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Top-Ranked ETFs to Play Fed's Seventh Rate Hike of 2022
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As expected, the Federal Reserve boosted its benchmark interest rate by 50 basis points this week. Fed Chair Jerome Powell reiterated the central bank's commitment to hike rates further in order to tame multi-decade highs in inflation. The latest rate hike took the benchmark rate to the range of 4.25% to 4.5%, its highest level in 15 years. However, the latest move was lower than its previous four three-quarter-point hikes.
The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023, before being slashed to 4.1% in 2024. That suggests that the Fed is prepared to hike its benchmark rate by an additional three-quarters of a point and then stay put until the end of 2023. This is quite expected as U.S. inflation is showing signs of peaking. In fact, the consumer price index for November slowed to one-year low (read: ETFs to Benefit as Inflation Drops to One-Year Low).
How to Play?
Value
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties caused by high inflation and rising rates.
Value stocks perform better in a rising rate environment which we have been witnessing currently. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #1 (Strong Buy).
Retail
Now, who can overlook consumer discretionary ETFs at this point of the year (due to holiday season)? NRF forecast that holiday sales will grow between 6% and 8% over 2021 to between $942.6 billion and $960.4 billion. The forecast is well above the 4.9% average over the past 10 years. Moreover, retail is a cyclical industry and often fares better in rising rate environment. Our pick for the busy holiday season is Zacks Rank #2 (Buy) SPDR S&P Retail ETF (XRT - Free Report) .
Small-Caps
This is a tricky space. The Halloween Effect on Russell 2000 was a gain of 494% versus 373% offered by the S&P 500 from February 1993 through 2010-end. Plus, small-cap securities have historically proven their outperformance in January. Plus, as the rate hike momentum will likely cool down, risk-on sentiments should bounce back. These factors put the focus on the small-cap ETF SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report) , which has a Zacks Rank #2.
Industrials
Industrial stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund (XLI - Free Report) has outperformed the S&P 500 this year. Biden’s huge infrastructure plan is a positive for the space. The fund XLI has a Zacks Rank #2 (read: 4 Sector ETFs to Play Upbeat November Jobs Data).
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Top-Ranked ETFs to Play Fed's Seventh Rate Hike of 2022
As expected, the Federal Reserve boosted its benchmark interest rate by 50 basis points this week. Fed Chair Jerome Powell reiterated the central bank's commitment to hike rates further in order to tame multi-decade highs in inflation. The latest rate hike took the benchmark rate to the range of 4.25% to 4.5%, its highest level in 15 years. However, the latest move was lower than its previous four three-quarter-point hikes.
The policymakers also forecast that their key short-term rate will reach a range of 5% to 5.25% by the end of 2023, before being slashed to 4.1% in 2024. That suggests that the Fed is prepared to hike its benchmark rate by an additional three-quarters of a point and then stay put until the end of 2023. This is quite expected as U.S. inflation is showing signs of peaking. In fact, the consumer price index for November slowed to one-year low (read: ETFs to Benefit as Inflation Drops to One-Year Low).
How to Play?
Value
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties caused by high inflation and rising rates.
Value stocks perform better in a rising rate environment which we have been witnessing currently. Moreover, during the peak of the pandemic, value stocks were hit hard. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation. Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) has a Zacks Rank #1 (Strong Buy).
Retail
Now, who can overlook consumer discretionary ETFs at this point of the year (due to holiday season)? NRF forecast that holiday sales will grow between 6% and 8% over 2021 to between $942.6 billion and $960.4 billion. The forecast is well above the 4.9% average over the past 10 years. Moreover, retail is a cyclical industry and often fares better in rising rate environment. Our pick for the busy holiday season is Zacks Rank #2 (Buy) SPDR S&P Retail ETF (XRT - Free Report) .
Small-Caps
This is a tricky space. The Halloween Effect on Russell 2000 was a gain of 494% versus 373% offered by the S&P 500 from February 1993 through 2010-end. Plus, small-cap securities have historically proven their outperformance in January. Plus, as the rate hike momentum will likely cool down, risk-on sentiments should bounce back. These factors put the focus on the small-cap ETF SPDR Portfolio S&P 600 Small Cap ETF (SPSM - Free Report) , which has a Zacks Rank #2.
Industrials
Industrial stocks historically yielded encouraging returns from December to May. However, industrial ETF Industrial Select Sector SPDR Fund (XLI - Free Report) has outperformed the S&P 500 this year. Biden’s huge infrastructure plan is a positive for the space. The fund XLI has a Zacks Rank #2 (read: 4 Sector ETFs to Play Upbeat November Jobs Data).