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September Rate Hike Odds Rise: Top Sector ETF & Stock Picks

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An upbeat August job report has bolstered the case for faster-than-expected rates hike once again. The U.S. economy added 201,000 jobs in August, representing 95 consecutive months of job additions -- the longest growth streak. Meanwhile, average hourly wages accelerated 10 cents to $27.16, taking the year-over-year increase to 2.9%, the biggest yearly rise since April 2009.The unemployment rate remained stable at nearly a two-decade low of 3.9% (read: August Wage Growth Hits 9-Year High: ETFs & Stocks to Surge).

The pickup in employment and solid wage growth will continue to keep the Fed on track to raise interest rates twice more this year with one expected in its FOMC meeting on Sep 26. Per the CME Group’s FedWatch Tool, interest rate futures traders are fully pricing in a third rate increase at the September meeting while the probability of an additional hike in December rose to 72% from 69% the day before the jobs data release.

Further, the booming economy also underscores the fact that it will be able to handle the aggressive rates hike. The Unites States is currently witnessing the fastest pace of growth in nearly four years, with a nearly two-decade low unemployment rate of 3.9% and 18-year high consumer confidence.

Who Will Gain?

A rising-rate environment is highly beneficial for cyclical sectors like financials, technology and consumer discretionary. As such, investors should focus on these sectors with the following top-ranked ETFs & stocks ahead of the upcoming third rake hike of this year.  

Banks

In the financial sector, banks are at the most-advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits.

The ultra-popular SPDR S&P Regional Banking ETF (KRE - Free Report) , having AUM of $5.1 billion and average trading volume of around 5.6 million, offers exposure to the regional banks. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 124 securities in its basket, the fund is widely spread out, with each security holding less than 2% of assets. The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Top-Ranked Bank ETFs & Stocks Set to Explode Higher).

With a market cap of $34.16 billion, SunTrust Banks Inc. (STI - Free Report) provides various financial services for consumers, businesses, corporations and institutions in the United States. The stock has above-industry-average earnings growth estimate of 38.86% for this year. It carries a Zacks Rank #2 (Buy) with a Value Score of B.

Technology

The technology sector should benefit as rising interest rates usually correlate with an economy that is gaining strength and is expected to grow at a faster pace, leading to increased IT spending.

Invesco DWA Technology Momentum ETF (PTF - Free Report) follows the Dorsey Wright Technology Technical Leaders Index and provides exposure to companies showing relative strength (momentum). Holding 43 stocks in the basket, it is well diversified, with each holding no more than 7.3% share. Software and Internet software & services takes the largest share at 28% share each. PTF is illiquid and relatively unpopular, with AUM of $156.8 million and average daily volume of 9,000 shares. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: ETFs Buoy on Booming Q2 Corporate Profits: 5 Best Charts).

Vishay Intertechnology Inc. (VSH - Free Report) , which is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors), sports a Zacks Rank #1 and has a Value Score of A. It is expected to see above-industry earnings growth of 39.86% for this year and has a market cap of $3.15 billion. You can see the complete list of today’s Zacks #1 Rank stocks here.

Consumer Discretionary

Higher interest rates usually indicate a healthy economy, which in turn leads to greater consumer power. An improving economy coupled with higher consumer confidence is making the consumer discretionary sector tempting to investors amid higher yields.

This Zacks #2 Ranked Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. It holds 80 stocks in its basket with heavy concentration on Amazon (AMZN - Free Report) at 25% while other securities hold less than 7.6% share. The ETF has key holdings in Internet & direct marketing retail, which accounts for one-third of the portfolio, while specialty retail, media and hotels restaurants & leisure round off the next three. It has AUM of $15.8 billion and trades in an average daily volume of nearly 5.2 million shares (read: Amazon Hits Trillion Dollar Market Cap: ETFs to Buy).

Guess' Inc. (GES - Free Report) has a market cap of $1.80 billion and designs, markets, distributes and licenses lifestyle collections of apparel and accessories for men, women and children. Its earnings are expected to grow above-average at 48.57% for the fiscal year (January 2019). The stock has a Zacks Rank #2 and VGM Score of A.

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