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Rate Sensitive ETFs to Explode Higher Post Fed Minutes
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The Fed minutes from the Jan 29-30 meeting confirms the patient view of the central bank toward future rates hike. The central bank is not in a hurry to raise interest rates this year, citing mounting risks to the U.S. economy, including slowdown in Chinese and European economies and waning stimulus from 2018 tax cuts.
The Fed last month suspended a three-year movement to raise rates and said that it will keep its short-term interest rates between 2.25% and 2.50%.
In such a scenario, rate sensitive sectors such as utilities and real estate will be the biggest beneficiaries, given their sensitivity to interest rates. Additionally, global headwinds such as still unresolved trade tensions, Brexit, geopolitical tensions and global growth worries are making investors jittery, raising the appeal for the stocks of these sectors. This is because these often act as a safe haven in times of market turbulence and offer higher returns due to their outsized yields (read: Real Estate ETFs Hit New Highs).
As a result, investors could make a short-term play on the rate sensitive sectors in the basket form as these will continue to trade smoothly if interest rates remain muted. Below, we have highlighted some ETFs from these sectors that could be excellent plays for investors in the coming weeks. These funds have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook, suggesting potential upside:
This fund targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 188 stocks in its basket with none accounting for more than 6.1% share. Specialized REITs takes the largest share at 31.5% while retail REITs and residential REITs round off the top three with double-digit exposure each. Expense ratio comes in at 0.12%. VNQ is the most popular and liquid ETFs with AUM of $32.7 billion and average daily volume of more than 7 million shares a day. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Real Estate ETF Hits New 52-Week High).
SCHH tracks the Dow Jones U.S. Select REIT Index, holding a well-diversified 101 stocks with none accounting for more than 8.4% of the assets. Residential REITs make up for the largest share at 22.6% while retail REITs, office REITs, specialized REITs and healthcare REITs round off the next four spots with double-digit allocation each. The product has AUM of $5.1 billion and average daily trading volume of 932,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
This is the most popular mortgage REIT ETF with AUM of $1.2 billion and average daily volume of 314,000 shares. It offers exposure to the U.S. residential and commercial mortgage real estate sectors by tracking the FTSE Nareit All Mortgage Capped Index. Holding 34 stocks in its basket, the fund is highly concentrated on the top two firms at a combined 30% share while other firms make up for less than 8% of the assets. It charges investors 48 bps a year in fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: A Look at Mortgage REIT ETFs Post Q4 Earnings).
With AUM of $9.4 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 11.8% share while other firms hold no more than 8.4% of the assets. Electric utilities take the top spot in terms of sectors at 60.3%, closely followed by multi utilities (32.6%). The product charges 13 bps in annual fees and sees a heavy volume of around 19.4 million shares on average. XLU has a Zacks ETF Rank #3 with a Medium risk outlook.
This ETF also targets the utilities sector and follows the MSCI US Investable Market Utilities 25/50 Index, holding 69 securities in its basket with none accounting for more than 9.8% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (29.8%). VPU has amassed $3.1 billion in its asset base and average daily volume of 218,000 shares. Expense ratio comes in at 0.10% (see: all the Utilities ETFs here).
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Rate Sensitive ETFs to Explode Higher Post Fed Minutes
The Fed minutes from the Jan 29-30 meeting confirms the patient view of the central bank toward future rates hike. The central bank is not in a hurry to raise interest rates this year, citing mounting risks to the U.S. economy, including slowdown in Chinese and European economies and waning stimulus from 2018 tax cuts.
The Fed last month suspended a three-year movement to raise rates and said that it will keep its short-term interest rates between 2.25% and 2.50%.
In such a scenario, rate sensitive sectors such as utilities and real estate will be the biggest beneficiaries, given their sensitivity to interest rates. Additionally, global headwinds such as still unresolved trade tensions, Brexit, geopolitical tensions and global growth worries are making investors jittery, raising the appeal for the stocks of these sectors. This is because these often act as a safe haven in times of market turbulence and offer higher returns due to their outsized yields (read: Real Estate ETFs Hit New Highs).
As a result, investors could make a short-term play on the rate sensitive sectors in the basket form as these will continue to trade smoothly if interest rates remain muted. Below, we have highlighted some ETFs from these sectors that could be excellent plays for investors in the coming weeks. These funds have a Zacks ETF Rank #3 (Hold) with a Medium risk outlook, suggesting potential upside:
Vanguard Real Estate ETF (VNQ - Free Report)
This fund targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 188 stocks in its basket with none accounting for more than 6.1% share. Specialized REITs takes the largest share at 31.5% while retail REITs and residential REITs round off the top three with double-digit exposure each. Expense ratio comes in at 0.12%. VNQ is the most popular and liquid ETFs with AUM of $32.7 billion and average daily volume of more than 7 million shares a day. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Real Estate ETF Hits New 52-Week High).
Schwab US REIT ETF (SCHH - Free Report)
SCHH tracks the Dow Jones U.S. Select REIT Index, holding a well-diversified 101 stocks with none accounting for more than 8.4% of the assets. Residential REITs make up for the largest share at 22.6% while retail REITs, office REITs, specialized REITs and healthcare REITs round off the next four spots with double-digit allocation each. The product has AUM of $5.1 billion and average daily trading volume of 932,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
iShares Mortgage Real Estate ETF (REM - Free Report)
This is the most popular mortgage REIT ETF with AUM of $1.2 billion and average daily volume of 314,000 shares. It offers exposure to the U.S. residential and commercial mortgage real estate sectors by tracking the FTSE Nareit All Mortgage Capped Index. Holding 34 stocks in its basket, the fund is highly concentrated on the top two firms at a combined 30% share while other firms make up for less than 8% of the assets. It charges investors 48 bps a year in fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: A Look at Mortgage REIT ETFs Post Q4 Earnings).
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $9.4 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 11.8% share while other firms hold no more than 8.4% of the assets. Electric utilities take the top spot in terms of sectors at 60.3%, closely followed by multi utilities (32.6%). The product charges 13 bps in annual fees and sees a heavy volume of around 19.4 million shares on average. XLU has a Zacks ETF Rank #3 with a Medium risk outlook.
Vanguard Utilities ETF (VPU - Free Report)
This ETF also targets the utilities sector and follows the MSCI US Investable Market Utilities 25/50 Index, holding 69 securities in its basket with none accounting for more than 9.8% share. More than half of the portfolio is allocated to electric utilities, closely followed by multi utilities (29.8%). VPU has amassed $3.1 billion in its asset base and average daily volume of 218,000 shares. Expense ratio comes in at 0.10% (see: all the Utilities ETFs here).
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>