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4 Sector ETFs to Win From Fed Rate Hike

·5 min read

It seems that the Russia-Ukraine tensions are not likely to dissuade the Fed from increasing interest rates this month. Fed Chair Jerome Powell, in his testimony, said that the central bank plans to raise its key interest rate from near zero at the Mar 15-16 monetary policy committee meeting to fight a historic surge in inflation.

Given this, investors should focus on areas/sectors that will benefit the most from the Fed’s tightening policy. ETFs like SPDR S&P Insurance ETF KIE, SPDR S&P Regional Banking ETF KRE, Vanguard Consumer Discretionary ETF VCR, and Technology Select Sector SPDR Fund XLK from different industries of the market seem compelling picks.

Powell currently proposed a quarter-point hike instead of a half-point indicating uncertainty related to the ongoing war. But he could move “more aggressively” if four-decade inflation does not abate substantially. Powell called the labor market “extremely tight” and said inflation has risen well above the Fed’s 2% target (read: 5 Must-Buy ETFs With Fed Tightening in the Cards).

The increase in interest rates will make borrowing expensive, driving up the cost of buying a new car or house or carrying credit card debt. However, Powell is betting that the economy can withstand modestly higher borrowing costs with a low 4% unemployment rate and solid consumer spending.

The initial phase of the rate increase will be good for stocks as it will reflect an improving economy, thereby benefiting cyclical sectors like financial, technology, industrials and consumer discretionary. Banks are in 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 earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies will be able to earn higher returns on their investment portfolio of longer-duration bonds.

Higher interest rates usually indicate a healthy economy, leading to greater consumer power and increased IT spending. An improving economy coupled with higher consumer confidence will make the consumer discretionary sector tempting to investors amid higher yields. Further, technology seems one of the safest sectors in a tight policy era as most companies are sitting on a huge cash pile. The cash reserves will ensure that these companies are not plagued by any financial trouble, even in a rising interest rate environment.

ETFs to Win

SPDR S&P Insurance ETF (KIE) follows the S&P Insurance Select Industry Index, holding 53 stocks in its basket, with each firm accounting for no more than 2.6% share. About 46.3% of the portfolio is allocated to property and casualty insurance, while life & health insurance and insurance brokers round off the next two spots with double-digit exposure.

SPDR S&P Insurance ETF has managed $437.8 million in its asset base and trades in a good average daily volume of about 957,000 shares. The product has an expense ratio of 0.35% and a Zacks Rank #3 (Hold) with a Medium risk outlook (read: Insurance ETFs to Rally on Solid Q4 Earnings).

SPDR S&P Regional Banking ETF (KRE) provides exposure to the regional banks’ segment by tracking the S&P Regional Banks Select Industry Index. It holds 137 stocks in its basket, with each accounting for no more than 3% of the assets.

SPDR S&P Regional Banking ETF has AUM of $5.6 billion and charges 35 bps in annual fees. It trades in an average daily volume of 11.2 million shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.   

Vanguard Consumer Discretionary ETF (VCR) follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 304 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail, automobile manufacturers and home improvement retail occupy the top spots with double-digit exposure each.

Vanguard Consumer Discretionary ETF is the low choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 143,000 shares a day. The fund has managed about $6 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #2 with a Medium risk outlook.

Technology Select Sector SPDR Fund (XLK) follows the Technology Select Sector Index and holds 75 stocks in its basket with higher concentration on the top two firms. Software takes the top spot at 32.8% from an industrial look while technology hardware storage & peripheral, semiconductors and IT services round off the next spots with double-digit exposure each (read: 5 Top-Ranked Tech ETFs to Buy at Bargain Price).

Technology Select Sector SPDR Fund has AUM of $45.5 billion and charges 10 bps in fees per year from investors. It trades in heavy volume of around 14 million shares a day on average. XLK has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.


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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
 
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
 
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
 
SPDR S&P Insurance ETF (KIE): ETF Research Reports
 
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Zacks Investment Research