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Fed Rate Hikes Peaking? Top-Ranked ETFs to Buy

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Stock markets rallied on Nov 1, 2023 in response to two significant factors: the Federal Reserve's possible peak in its historic tightening campaign and the latest earnings reports from major companies. The Fed stayed put in the November meeting.

While the Fed left the door open for another rate increase, officials indicated that the recent surge in long-term Treasury yields might reduce the urgency for further tightening. In Europe, the Stoxx 600 index witnessed a remarkable winning streak, the longest since July, with real estate stocks at the forefront of this surge, per Bloomberg.

The optimism was further reflected in Asian markets, where stocks saw their biggest gain in nearly four months. This recovery marked a significant turnaround after Asian stocks had lost over 12% of their value between July and October, per Bloomberg.

Investors seemed relieved by the possibility that the era of higher US interest rates and continuous rate hikes might be drawing to a close. This sentiment was bolstered by the Federal Reserve's Chair Jerome Powell, who emphasized the committee's cautious approach, suggesting a reduced likelihood of immediate policy changes.

U.S. Yields Ease Amidst Reduced Borrowing Plans and Economic Concerns

In the United States, yields on government bonds were already trending lower prior to the Federal Reserve's decision. The US government's announcement of plans to borrow slightly less than expected over the next three months provided reassurance to investors who had been concerned about a potential deluge of debt issuance.

Additionally, a gauge of US factory activity recently came in below expectations, fueling concerns of an impending economic downturn. This disappointing data further contributed to the easing of US yields, as investors sought safety in government bonds.

Against this backdrop, investors can bet on the below-mentioned top-ranked ETFs. These ETFs have a Zacks Rank #1 (Strong Buy).

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report)

As rates hover around solid levels, value stocks will likely prevail in the rest of 2023. Value stocks outperform in a higher rate environment. The fundcharges 4 bps in fees.

Financial Select Sector SPDR ETF (XLF - Free Report)

As the short-term rates not likely to surge higher (as the Fed keeps the rate same) and long-term rates are likely to soar on decent economic activities in the holiday season, yield curve is likely to steepen ahead. This would result in a higher interest rate margin for banks and financial institutions. The fund XLF charges 10 bps in fees.

Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report)

Americans are expected to spend $875 on average on gifts, decorations, food and other key seasonal items in the holiday season this year, according to the National Retail Federation (NRF). The amount is $42 more than consumers planned to spend in 2022 and is in line with the average holiday budget over the last five years. Also, according to a recent NRF survey, 39% of consumers indicated they intend to commence their holiday shopping sooner than their usual routine this year. This consumer behavior makes XLY a strong buy currently (read: Why to Buy Online Retail ETFs Now?).

VanEck Semiconductor ETF (SMH - Free Report)

The AI boom has made the semiconductor a winning area lately. Earnings of Advanced Micro Devices (AMD - Free Report) , Intel (INTC - Free Report) and Qualcomm (QCOM - Free Report) have been upbeat lately. The AI king Nvidia is yet to report. The optimistic atmosphere in the chip market makes SMH a buy-rated ETF right now.

(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)

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