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Fed Most Likely to Hike Rates After 3 Years: ETFs to Win/Lose
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Key Takeaways
Value, technology and energy ETFs could offer opportunities amid higher rates and persistent inflation.
Low-volatility, high-dividend ETFs may help investors navigate potential market turbulence.
Homebuilders, leisure and small-cap ETFs could face pressure from rising borrowing costs.
The Federal Reserve's September policy meeting kicked off Tuesday, and markets are widely expecting a 25-basis-point rate hike on Wednesday. Persistent inflation remains a key concern for policymakers, with the latest rise in energy prices adding to the pressure.
If the Fed delivers, it would mark its first interest rate increase since 2023, when the Jerome Powell-led central bank wrapped up its post-pandemic rate-hiking campaign, as mentioned in Yahoo Finance. Inflation, however, has stayed above the Fed's 2% target for more than five years, with the ongoing war in the Middle East adding another layer of uncertainty.
As Fed Chairman Kevin Warsh put it during his August Jackson Hole Symposium speech, "We have work to do."
Will the Fed Hold or Hike?
While a rate hike is the market's base case, a pause isn't entirely off the table. Traders are pricing in a 92% chance of a 25-basis-point increase, according to CME Group's FedWatch tool. Warsh has repeatedly emphasized that he doesn't want to provide markets with forward guidance on interest rate decisions.
ETF Areas to Gain
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, as we have been witnessing currently. State Street SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) has a Zacks Rank #2 (Buy) (read: Fed Hike or Not: Large-Cap ETFs to Stay Strong).
Technology
Although the tech sector underperforms in a higher rate environment, investors should note that during periods of turbulence, certain technology giants can serve as relative safe havens.
The artificial intelligence (AI) trade continues to benefit from a strong structural tailwind. Hyperscalers are expected to boost investment massively. Rate hikes are unlikely to slow down the momentum of the AI euphoria (read: Fed Hike or Not: Large-Cap ETFs to Stay Strong).
State Street Technology Select Sector SPDR ETF (XLK - Free Report) should stay resilient despite some short-term bumps.
Energy
Energy stocks and utilities are maintaining high capital expenditures (capex) because skyrocketing power demands from AI data centers are outdoing electrical grid capacity. Moreover, the Iran war has kept energy prices elevated, which is further supporting energy stocks. No wonder, State Street Energy Select Sector SPDR ETF (XLE - Free Report) jumped about 2% on Sept. 15, 2026.
Low-Volatility High Dividend
A focus on low-volatility ETFs could prove intriguing as a Fed rate hike and commentary may cause moderate turbulence in the market. And if that low-volatility profile comes with high dividend payments, the combination would look even better. Franklin International Low Volatility High Dividend Index ETF (LVHI - Free Report) serves both factors. The fund yields 4.62% annually.
ETF Areas to Lose
Homebuilding
The 10-year Treasury yield recently pushed near 5% (a multi-year high level) due to inflation worries. Average 30-year fixed mortgage rates have climbed past 7%. Higher monthly payments should reduce home sales and raise buyer denial rates. iShares U.S. Home Construction ETF (ITB - Free Report) may feel the pinch.
Leisure
Leisure stocks face major downward pressure as higher global interest rates and sticky inflation squeeze consumer discretionary budgets. Invesco Leisure and Entertainment ETF (PEJ - Free Report) lost as much as 2% on the day.
Small Caps
iShares Russell 2000 ETF (IWM - Free Report) may feel the brunt of higher rates as the segment depends on debt materially. Tight consumer budgets may also hurt this segment.
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Image: Bigstock
Fed Most Likely to Hike Rates After 3 Years: ETFs to Win/Lose
Key Takeaways
The Federal Reserve's September policy meeting kicked off Tuesday, and markets are widely expecting a 25-basis-point rate hike on Wednesday. Persistent inflation remains a key concern for policymakers, with the latest rise in energy prices adding to the pressure.
If the Fed delivers, it would mark its first interest rate increase since 2023, when the Jerome Powell-led central bank wrapped up its post-pandemic rate-hiking campaign, as mentioned in Yahoo Finance. Inflation, however, has stayed above the Fed's 2% target for more than five years, with the ongoing war in the Middle East adding another layer of uncertainty.
As Fed Chairman Kevin Warsh put it during his August Jackson Hole Symposium speech, "We have work to do."
Will the Fed Hold or Hike?
While a rate hike is the market's base case, a pause isn't entirely off the table. Traders are pricing in a 92% chance of a 25-basis-point increase, according to CME Group's FedWatch tool. Warsh has repeatedly emphasized that he doesn't want to provide markets with forward guidance on interest rate decisions.
ETF Areas to Gain
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, as we have been witnessing currently. State Street SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report) has a Zacks Rank #2 (Buy) (read: Fed Hike or Not: Large-Cap ETFs to Stay Strong).
Technology
Although the tech sector underperforms in a higher rate environment, investors should note that during periods of turbulence, certain technology giants can serve as relative safe havens.
The artificial intelligence (AI) trade continues to benefit from a strong structural tailwind. Hyperscalers are expected to boost investment massively. Rate hikes are unlikely to slow down the momentum of the AI euphoria (read: Fed Hike or Not: Large-Cap ETFs to Stay Strong).
State Street Technology Select Sector SPDR ETF (XLK - Free Report) should stay resilient despite some short-term bumps.
Energy
Energy stocks and utilities are maintaining high capital expenditures (capex) because skyrocketing power demands from AI data centers are outdoing electrical grid capacity. Moreover, the Iran war has kept energy prices elevated, which is further supporting energy stocks. No wonder, State Street Energy Select Sector SPDR ETF (XLE - Free Report) jumped about 2% on Sept. 15, 2026.
Low-Volatility High Dividend
A focus on low-volatility ETFs could prove intriguing as a Fed rate hike and commentary may cause moderate turbulence in the market. And if that low-volatility profile comes with high dividend payments, the combination would look even better. Franklin International Low Volatility High Dividend Index ETF (LVHI - Free Report) serves both factors. The fund yields 4.62% annually.
ETF Areas to Lose
Homebuilding
The 10-year Treasury yield recently pushed near 5% (a multi-year high level) due to inflation worries. Average 30-year fixed mortgage rates have climbed past 7%. Higher monthly payments should reduce home sales and raise buyer denial rates. iShares U.S. Home Construction ETF (ITB - Free Report) may feel the pinch.
Leisure
Leisure stocks face major downward pressure as higher global interest rates and sticky inflation squeeze consumer discretionary budgets. Invesco Leisure and Entertainment ETF (PEJ - Free Report) lost as much as 2% on the day.
Small Caps
iShares Russell 2000 ETF (IWM - Free Report) may feel the brunt of higher rates as the segment depends on debt materially. Tight consumer budgets may also hurt this segment.