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Fed Hikes by 25 Bps to Above 5%: ETFs to Win/Lose

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The Federal Reserve raised its benchmark interest rate by 0.25% (as expected) on Wednesday, which pushed the policy rate to a range of 5%-5.25%, the highest it has been since September 2007. The Fed's move is part of its most aggressive rate-hiking campaign since the 1980s, as it tries to tackle elevated inflation rates.

However, in its statement, the central bank made it clear that it is still "highly attentive" to inflation risks, and future rate hikes will be dependent on the impact of previous hikes on the economy and financial developments.

Fed officials, however, removed key language in its policy statement from March which said "the Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

Some market watchers are of the view that Wednesday’s hike is the last of the cycle. The labor market is strong but showing signs of softening and the economy is somewhat resilient. Plus, recent bank runs and along with a debt-ceiling deal drama could make the case stronger for a pause in interest rate hikes, as they could lead to further weaknesses in the financial system. 

Meanwhile, the target range for the fed funds rate aligns with the interest rate projections officials released in March, which anticipated rates reaching their peak within a range of 5%-5.25% and persisting at that level for the remainder of the year. However, inflation still rules. So, one can’t rule out options for future rate hikes, though chances of a June rate hike is slim.

So, what does this mean for investors?

Growth Stocks to Gain Over Value?

SPDR Portfolio S&P 500 Growth ETF (SPYG - Free Report) has added more thanSPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) as further hikes in rates are less likely in the medium term. As growth stocks fare better in a falling rate environment, SPYG should rebound in the coming days.

Retail to Keep Rolling Ahead?

The latest U.S. GDP print for the first quarter of 2023 indicated that the personal saving rate—personal saving as a percentage of disposable personal income—came in at 4.8% compared with 4.0% in the fourth quarter of 2022. This happened despite an uptick in inflation. Households may be using their extra savings more cautiously due to worries about the recession.

Disposable personal income increased 12.5% in the first quarter, compared with 8.9% in the fourth quarter. This means retail sector should be unfazed by recent rate hike. And if the Fed pauses ahead, nothing could be better for retailers. SPDR S&P Retail ETF (XRT - Free Report) has a Zacks Rank #1 (Strong Buy).

Homebuilding Stocks Awaiting a Groundbreaking Rally?

iShares U.S. Home Construction ETF (ITB - Free Report) has made quite a rally of late with 6.8% gains in the past one month. Some favorable industry-specific data made this possible. The industry has been reeling under pressure for long thanks to low inventory, labor shortage and higher prices. However, a less-hawkish Fed this year could come as a relief to the long-struggling space.

Short-Term Bond ETFs: A Lucrative Bet?

The short-term corner of the Treasury market has been an area to watch lately, given the current stock market volatility. Banking woes and uncertainty over the Fed’s rate hike have made investors jittery, compelling them to hoard cash. As such, the appeal for cash-like ETFs has been on the rise as investors seek to mitigate the risk of a decline in the stock market.

iShares Short Treasury Bond ETF (SHV - Free Report) intends to assess U.S. Treasury issued debt. Only U.S. dollar denominated, fixed rate securities with minimum term to maturity greater than one month and less than or equal to one year are included. The fund charges 15 bps in fees and yields 2.655 annually.


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