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Fed Hikes Rates as Expected: ETF Areas That Gained

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As widely expected, the Fed put the third rate hike of the year into effect in its September meeting. The Fed raised the benchmark interest rates by a modest 25 bps to 2.00-2.25% (the same as that in April 2008), reflecting the growth momentum of the U.S. economy and the well-being of the labor market. It marked the eighth rate hike since the first lift-off in December 2015.

The guidance for this year remained unchanged as policy makers seeking one more hike this year, totaling four hikes in 2018. The central bank also expects the U.S. economy to see at least three more years of growth, per Reuters. The U.S. central bank maintains its view of three more hikes next year and one in 2020.

If these happen, the rates will reach a level beyond which monetary policy will neither be accommodative nor tight.

Inside Upbeat Economic Forecast

The Fed raised its forecast for 2018 real GDP growth from 2.8% in June to 3.1% and from 2.4% to 2.5% for 2019 but maintained the 2020 growth forecasts at 2.0%. The Fed projected the longer-run growth measure of 1.8%. The central bank issued projections for 2021, which calls for economic growth of 1.8%, in line with the long-run forecast.

PCE inflation expectations were maintained at 2.1% for 2018 and were guided lower to 2% from 2.1% for 2019. Federal funds rate projections for 2018, 2019 and 2020 were maintained at 2.4%, 3.1% and 3.4%, respectively. For the longer term, the rate is projected at 3.0%, up from 2.9% from June projections.

Market Reaction

As the tightening move was largely expected, the Treasury market did not give any wild reaction. In fact, the yield on 10-year U.S. Treasury fell to 3.06% on Sep 26 from 3.10% recorded on the previous day. In fact, iShares 20+ Year Treasury Bond ETF (TLT - Free Report) added about 0.7% on Sep 26. Invesco DB US Dollar Bullish (UUP - Free Report) was up 0.04% on Sep 26.

Top U.S. ETFs like SPDR S&P 500 ETF (SPY - Free Report) (down 0.3%) and SPDR Dow Jones Industrial Average ETF (DIA - Free Report) (down 0.4%) ended in the red on Sep 26. However, tech-heavy PowerShares QQQ ETF (QQQ - Free Report) added about 0.1% on Sep 26.

Against this backdrop, we highlight below a few ETF areas that have gained on Sep 26.

Consumer Discretionary

An improving economy with a strengthening labor market and a moderately rising interest rate environment is great for consumer discretionary stocks. First Trust Nasdaq Retail ETF (FTXD - Free Report) , which was up 1.2% on Sep 26, can be thus on investors’ wish list.

Other consumer ETFs like Invesco DWA Consumer Cyclicals Momentum ETF (PEZ - Free Report) (up 0.9% on Sep 26), Fidelity MSCI Consumer Discretionary ETF (FDIS - Free Report) (up 0.4%) and iShares US Consumer Services ETF (IYC - Free Report) (up 0.4%) have also tacked on gains on Sep 26 (read: Time to Buy Consumer Discretionary ETFs: 5 Top Picks).

Healthcare

As bond yields have started to rise and some uncertainty prevails in the market owing to rising rates and trade tensions, investors now need to focus on stable bets like the Healthcare sector. Invesco S&P 500 Equal Weight Health Care ETF (RYH) (up 0.4%), Health Care Select Sector SPDR ETF (XLV - Free Report) (up 0.2%) and iShares Evolved US Healthcare Staples ETF IEHS (up 0.4%) are some of the sector ETFs investors are pinning their hopes on (read: 5 Health Care ETFs Outperforming XLV on YTD Basis).

Large-Caps

It is a surprise winner after a rate hike as the dollar strength does not justify a rally in large-caps. But since the odds of a September rate hike was already priced in and some international economies like the Euro zone and Japan are looking up, large-cap U.S. ETFs like Invesco Russell Top 200 Pure Growth ETF (PXLG - Free Report) (up 0.3% on Sep 26) and NuShares ESG Large-Cap Growth ETF (NULG - Free Report) (up 0.2%) saw some gains on Sep 26.

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