The major U.S. benchmarks witnessed the worst decline since Jun 24 and one of the key reasons behind the plunge was increased rate hike fears. Comments from crucial Fed officials reignited the possibilities of a rate hike by the end of this year. In this scenario, the sectors that are poised to gain from a rising rate scenario are likely to remain on investors’ radar in the days ahead.

Fed Officials Hint at Hike 

Eric Rosengren, Boston Fed President, who is also a voting member in Fed’s policy meeting, stated that gradual tightening is likely to be appropriate" in order to maintain the “full employment” scenario. Though he remained silent about the timing, his comments raised speculations of a hike in the near term. He also added: “My personal view, based on data that we have received to date, is that a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy.”

Rosengren thinks that "risks to the forecast are becoming increasingly two-sided." The U.S. economy managed to witness stable economic environment amid sluggish global growth scenario and remained “relatively resistant to shocks from abroad of late.”  He assessed that if interest rates remain low for long in this scenario, it may result into “overshooting the U.S. economy's growth" (read: Financial ETFs Surged in August: Will the Rally Last?)

However, another voting member, Daniel Tarullo, the Federal Reserve Governor said in an interview that “more tangible evidence of inflation” is needed for increasing rates. He said the Fed should consider a rate hike when inflation “shows that it is picking up in a sustainable way to be at [the 2%] target rather than being below where it has been for the most of the last five or six years.” Despite these comments, he said that rate hike by the end of this year is still possible.

Best Sectors

Though a September hike is almost unlikely, the possibilities of a rate rise by the end of this year are significantly high. In this scenario, investors will closely track the performance of sectors that are poised to benefit or lose in a rising rate environment. Let’s have a look at some sectors that are poised to gain if the Fed opts for a rate hike in the near future (read: Treasury Bond ETFs in Focus on Rising Rate Hike Prospects).

Financial

It is widely known that the financial sector is one of the major beneficiaries of a rise in interest rates. The financial sector, which includes banks, brokerage firms, asset managers and insurers, are poised to gain from rate hike as the steepening yield curve tends to bolster profits for banks, insurance companies, discount brokerage firms and asset managers. One who seeks to track the performance of the sector may consider following Financial Select Sector SPDR ETF (XLF Quick QuoteXLF - Free Report) , which in turn tracks the broader financial sector of the U.S.

This is by far the most popular financial ETF in the space with an AUM of $16.1 billion and an average daily volume of over 41 million shares. The fund follows the Financial Select Sector Index, holding 95 stocks in its basket. In terms of industrial exposure, banks take the top spot at 34.3% while insurance and capital markets make up for double-digit exposure each. The fund charges 14 bps in annual fees. XLF carries a Zack ETF Rank #3 (Hold) with a Medium risk outlook (read: Is it Time to Invest in Financial ETFs?).

Technology

Another sector that is likely to benefit from a rate hike scenario is technology. This mature sector is expected to get less affected by an increase in interest rates as components from this sector are believed to require low volume of debt for financing their expenditures. Moreover, significant growth in the economy on the back of which rate hike generally occurs, is also expected to boost the sector. Thus, the broader U.S. technology sector ETF – Technology Select Sector SPDR ETF (XLK Quick QuoteXLK - Free Report) – may be considered a good option during a rising rate scenario.

This fund, which manages about $13.5 billion in its asset base, is the most popular choice in the technology space. It provides exposure to a basket of 75 technology stocks by tracking the Technology Select Sector Index. The ETF has an expense ratio of 0.14% while volume is solid at nearly 9 million shares. The product is well spread out across a number of sectors with Internet software & services, software, IT services, hardware & storage, semiconductors and diversified telecom services accounting for a double-digit allocation each. It also has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: 3 Low Expense Passive U.S. Equity ETFs to Bolster Returns).

Consumer Discretionary

Stocks from consumer discretionary also seem a good bet in a rising rate scenario. This is because these typically perform well in an improving economy justified by the healing job market, recovering housing market, surging stock market and expanding economic activities. In this backdrop, the broader consumer discretionary ETF, Consumer Discretionary Select Sector SPDR ETF (XLY Quick QuoteXLY - Free Report) is likely to remain on investors’ radar in the near future.

This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. With an asset base of $10 billion, XLY is the largest and most popular ETF in its space. It holds 89 shares in its basket. Sector wise, Media takes the top spot with 23.2% of the assets, closely followed by Specialty Retail (20.2%). The product trades in a solid volume of 5 million shares per day and charges 14 bps in fees. XLY carries a Zack ETF Rank #3 with a Medium risk outlook.

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