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ETFs Set to Soar on Fed 50 Bps Rate Hike, Hawkish Tone
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In its FOMC meeting concluded yesterday, the Federal Reserve raised interest rates by 50 bps as expected and revealed a hawkish view for next year. This marks the seventh rate hike this year in an unprecedented move to reign in inflation.
Amid this backdrop, investors should consider products that could prove extremely beneficial in a rising rate environment. Some of these ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , iShares US Technology ETF (IYW - Free Report) and iShares Core S&P U.S. Value ETF (IUSV - Free Report) from different corners of the market seem compelling picks.
The rate hike brings the benchmark interest rate, the federal funds rate, to 4.25-4.50%, the highest level in 15 years. The central bank now projects at least 75 bps of rate hike, peaking at 5.1% by the end of 2023, 50 bps higher than the previously projected 4.6% back in September. The rate will then be cut to 4.1% in 2024.
The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and thus slowed down economic growth (read: Low-Beta ETFs to Counter Market Volatility).
However, higher interest rates usually indicate a healthy economy, thereby benefiting cyclical sectors like financials, technology, industrials and consumer discretionary. Banks are in the most advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies will be able to earn higher returns on their investment portfolio of longer-duration bonds.
A healthy economy also leads to greater consumer power and increased IT spending. Further, technology seems one of the safest sectors in a tight policy era as most companies are sitting on a huge cash pile. The cash reserves will ensure that these companies are not plagued by any financial trouble, even in a rising interest rate environment.
SPDR S&P Regional Banking ETF provides exposure to the regional banks’ segment by tracking the S&P Regional Banks Select Industry Index. It holds 143 stocks in its basket, with each accounting for no more than 2.4% of the assets (read: ETFs to Gain on Cooling U.S. Inflation Data).
SPDR S&P Regional Banking ETF has AUM of $3 billion and charges 35 bps in annual fees. It trades in an average daily volume of 7.2 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High-risk outlook.
Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 315 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail and automobile manufacturers occupy the top spots with double-digit exposure each.
Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors 10 bps in annual fees while volume is good at nearly 87,000 shares a day. The fund has managed $4.1 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 141 U.S. electronics, computer software and hardware, and informational technology companies.
iShares Dow Jones US Technology ETF has AUM of $8.4 billion and charges 39 bps in fees and expenses. Volume is good as it exchanges nearly 1.1 million shares a day. IYW has a Zacks ETF Rank #2 with a Medium risk outlook.
iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 739 stocks in its basket, with each accounting for no more than a 3% share. iShares Core S&P U.S. Value ETF is widely spread across sectors, with health care, financials, industrials, consumer staples and information technology occupying double-digit exposure each (read: How S&P 500 ETFs Fared in 2022; What's Waiting for 2023?).
iShares Core S&P U.S. Value ETF has AUM of $13 billion and trades in an average daily volume of 857,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.
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ETFs Set to Soar on Fed 50 Bps Rate Hike, Hawkish Tone
In its FOMC meeting concluded yesterday, the Federal Reserve raised interest rates by 50 bps as expected and revealed a hawkish view for next year. This marks the seventh rate hike this year in an unprecedented move to reign in inflation.
Amid this backdrop, investors should consider products that could prove extremely beneficial in a rising rate environment. Some of these ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) , Vanguard Consumer Discretionary ETF (VCR - Free Report) , iShares US Technology ETF (IYW - Free Report) and iShares Core S&P U.S. Value ETF (IUSV - Free Report) from different corners of the market seem compelling picks.
The rate hike brings the benchmark interest rate, the federal funds rate, to 4.25-4.50%, the highest level in 15 years. The central bank now projects at least 75 bps of rate hike, peaking at 5.1% by the end of 2023, 50 bps higher than the previously projected 4.6% back in September. The rate will then be cut to 4.1% in 2024.
The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and thus slowed down economic growth (read: Low-Beta ETFs to Counter Market Volatility).
However, higher interest rates usually indicate a healthy economy, thereby benefiting cyclical sectors like financials, technology, industrials and consumer discretionary. Banks are in the most advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies will be able to earn higher returns on their investment portfolio of longer-duration bonds.
A healthy economy also leads to greater consumer power and increased IT spending. Further, technology seems one of the safest sectors in a tight policy era as most companies are sitting on a huge cash pile. The cash reserves will ensure that these companies are not plagued by any financial trouble, even in a rising interest rate environment.
We have detailed four of the ETFs below:
SPDR S&P Regional Banking ETF (KRE - Free Report)
SPDR S&P Regional Banking ETF provides exposure to the regional banks’ segment by tracking the S&P Regional Banks Select Industry Index. It holds 143 stocks in its basket, with each accounting for no more than 2.4% of the assets (read: ETFs to Gain on Cooling U.S. Inflation Data).
SPDR S&P Regional Banking ETF has AUM of $3 billion and charges 35 bps in annual fees. It trades in an average daily volume of 7.2 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High-risk outlook.
Vanguard Consumer Discretionary ETF (VCR - Free Report)
Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 315 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail and automobile manufacturers occupy the top spots with double-digit exposure each.
Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors 10 bps in annual fees while volume is good at nearly 87,000 shares a day. The fund has managed $4.1 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares US Technology ETF (IYW - Free Report)
iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 141 U.S. electronics, computer software and hardware, and informational technology companies.
iShares Dow Jones US Technology ETF has AUM of $8.4 billion and charges 39 bps in fees and expenses. Volume is good as it exchanges nearly 1.1 million shares a day. IYW has a Zacks ETF Rank #2 with a Medium risk outlook.
iShares Core S&P U.S. Value ETF (IUSV - Free Report)
iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 739 stocks in its basket, with each accounting for no more than a 3% share. iShares Core S&P U.S. Value ETF is widely spread across sectors, with health care, financials, industrials, consumer staples and information technology occupying double-digit exposure each (read: How S&P 500 ETFs Fared in 2022; What's Waiting for 2023?).
iShares Core S&P U.S. Value ETF has AUM of $13 billion and trades in an average daily volume of 857,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.