This article was originally published on ETFTrends.com.
Last month, the Federal Reserve raised interest rates for a third time this year, possibly setting the stage for a fourth rate hike in December. As is often the case, some exchange traded funds react better to Fed tightening than others.
On a historical basis, top-performing ETFs in the month after a Fed hike include some oil funds and a major regional bank ETF.
Related: Top 34 Oil ETFs
“CNBC used analytics tool Kensho to determine the best-performing ETFs when the 10-year Treasury note yield rises 25 basis points or more over a span of 30 days,” reports CNBC. “There have been 18 instances of such a rate move happening since 2008. Last week alone, the 10-year yield rose about 18 basis points to above 3.2 percent.”
Top Oil ETF Performers
Among the best-performing ETFs in the month following a Fed rate increase is the VanEck Vectors Oil Service ETF (OIH) . Oil services stocks are usually highly correlated to oil prices and have been among the worst or best performers in the energy space, depending on what direction oil prices were swinging toward.
“Strong economic data and comments on U.S. monetary policy from the chairman of the Federal Reserve were a boon to interest rates last week,” according to CNBC. “The 10-year U.S. note yield jumped as unemployment continues to drop, the U.S. services sector is expanding rapidly and Fed Chairman Jerome Powell said the central bank is 'a long way' from getting interest rates to neutral.”
On a related note, the United States Oil Fund (USO) , which tracks West Texas Intermediate crude oil futures, is another solid performer in the month following a rate increase. Not surprisingly, the S PDR S&P Regional Banking ETF (KRE) also has a reputation for upside immediately rate hikes.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector. Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins.
“Shares in the VanEck Vectors Oil Services ETF saw a 6.5 percent boost over the month when rates jumped, while shares of the United States Oil Fund ETF ran up 4.5 percent, according to Kensho. The SPDR S&P Regional Banking ETF is also a top-performer, surging 4.9 percent,” according to CNBC.
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