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All eyes are currently on the crucial two-day FOMC meeting (starting today) as the central bank is highly anticipated to raise interest rates for the second time this year by 25 bps. Per CME group, the odds of a June rate hike are 96%. This would also mark the seventh rate hike since December 2015.
Investors are also keenly waiting for the Fed’s guidance on the future rate trajectory. Currently, the Fed forecasts a total of three rates hike for this year. Growing inflationary pressure and improving economy could compel the Fed to add one more rate hike in its forecast for this year. Notably, the Consumer Price Index rose 0.2% in April, bringing the annual inflation (12 months through April) to 2.5% - the biggest gain since February 2017 and well above the Fed’s 2% target. Unemployment also dropped to 3.8%, the lowest level since 2000.
The economy has expanded for nine years and the United States has now entered its second-longest expansion phase since 1785. However, many experts caution against the fourth rate hike and expect the Fed to leave its future rate forecast unchanged, thanks to tariff and trade threats that could hamper global growth.
A surprise could be in store as the Fed may signal an early exit from its history-making program to reduce the level of bonds on its balance sheet (read: ETFs to Watch Out For This Eventful Week).
Given the fact that a rate increase is widely expected in the meeting, several ETFs are poised to gain or lose on the upcoming Fed decision. Further, the future rate trajectory will also have an influence on these funds. Let’s have a look:
A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular KRE, having AUM of $5.3 billion and average daily volume of 6.3 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 120 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Regional Bank ETFs: What Investors Need to Know).
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has so far managed an asset base of $586.7 million while seeing an average daily volume of around 1.2 million shares. It charges 79 bps in total fees and expenses and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
The strength in dollar would knock down the returns of international investments and thus raise the appeal for currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 945 securities in its basket. The ETF has AUM of $6.1 billion and trades in solid volume of nearly 1.3 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Currency Hedged ETFs Gaining Love on Rising Dollar).
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $34.7 billion and average daily volume of around 7.3 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs to Watch Ahead of U.S.-North Korea Summit).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in in the high yield bond space with AUM of $15.3 billion and average daily volume of around 14.6 million shares. It charges 49 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,000 securities in the basket. The ETF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 69 bps in annual fees from investors. It holds 972 securities and has AUM of $38.4 billion. The product trades in average daily volume of more than 68 billion shares and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top and Flop EM ETFs as Taper Tantrum Completes 5 Years).
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June Rate Hike in the Cards: ETFs to Win & Lose
All eyes are currently on the crucial two-day FOMC meeting (starting today) as the central bank is highly anticipated to raise interest rates for the second time this year by 25 bps. Per CME group, the odds of a June rate hike are 96%. This would also mark the seventh rate hike since December 2015.
Investors are also keenly waiting for the Fed’s guidance on the future rate trajectory. Currently, the Fed forecasts a total of three rates hike for this year. Growing inflationary pressure and improving economy could compel the Fed to add one more rate hike in its forecast for this year. Notably, the Consumer Price Index rose 0.2% in April, bringing the annual inflation (12 months through April) to 2.5% - the biggest gain since February 2017 and well above the Fed’s 2% target. Unemployment also dropped to 3.8%, the lowest level since 2000.
The economy has expanded for nine years and the United States has now entered its second-longest expansion phase since 1785. However, many experts caution against the fourth rate hike and expect the Fed to leave its future rate forecast unchanged, thanks to tariff and trade threats that could hamper global growth.
A surprise could be in store as the Fed may signal an early exit from its history-making program to reduce the level of bonds on its balance sheet (read: ETFs to Watch Out For This Eventful Week).
Given the fact that a rate increase is widely expected in the meeting, several ETFs are poised to gain or lose on the upcoming Fed decision. Further, the future rate trajectory will also have an influence on these funds. Let’s have a look:
ETFs to Win
SPDR S&P Regional Banking ETF (KRE - Free Report)
A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular KRE, having AUM of $5.3 billion and average daily volume of 6.3 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 120 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Regional Bank ETFs: What Investors Need to Know).
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. The fund has so far managed an asset base of $586.7 million while seeing an average daily volume of around 1.2 million shares. It charges 79 bps in total fees and expenses and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Deutsche X-trackers MSCI EAFE Hedged Equity ETF (DBEF - Free Report)
The strength in dollar would knock down the returns of international investments and thus raise the appeal for currency-hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 945 securities in its basket. The ETF has AUM of $6.1 billion and trades in solid volume of nearly 1.3 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Currency Hedged ETFs Gaining Love on Rising Dollar).
ETFs to Lose
SPDR Gold Trust ETF (GLD - Free Report)
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $34.7 billion and average daily volume of around 7.3 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: ETFs to Watch Ahead of U.S.-North Korea Summit).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in in the high yield bond space with AUM of $15.3 billion and average daily volume of around 14.6 million shares. It charges 49 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,000 securities in the basket. The ETF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
iShares MSCI Emerging Markets ETF (EEM - Free Report)
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 69 bps in annual fees from investors. It holds 972 securities and has AUM of $38.4 billion. The product trades in average daily volume of more than 68 billion shares and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top and Flop EM ETFs as Taper Tantrum Completes 5 Years).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>