5 ETFs to Watch Ahead of the Fed Meeting
All eyes are currently on the crucial two-day FOMC meeting (slated to start on Jul 24). The central bank is highly anticipated to lift the interest rates one more time as it ends a 16-month hiking cycle that has been the most aggressive fight against U.S. inflation in 40 years.
Several ETFs are in focus and can see outsized volume, depending on the upcoming Fed decision. A few ETFs — including Invesco KBW Regional Banking ETF KBWR, Vanguard Consumer Discretionary ETF VCR, Invesco DB US Dollar Index Bullish Fund UUP, SPDR Gold Trust ETF GLD and iShares MSCI Emerging Markets ETF EEM — are in focus.
After a pause in June following 10 consecutive rate hikes, the Fed is expected to raise interest rates by 25 bps to 5.25%-5.50%, the highest level since 2001, according to all 106 economists polled by Reuters, with the majority saying that this will be the last increase of the current tightening cycle.
With price pressure diminishing last month, almost all economists expect no change to rates at the September meeting and just one-fifth of the group predicts another hike by the November meeting. Inflation in the United States cooled down for the 12th consecutive month in June. The Consumer Price Index rose 3% year over year, marking the lowest rate since early 2021, and 0.2% over the last month. Although inflation is still significantly above the Federal Reserve's 2% target, it has dropped from a peak of 9.1% (read: 5 ETFs to Gain as Inflation Drops to a 2-Year Low).
Economic activity has continued to expand at a modest pace, with job gains being robust in recent months and the unemployment rate remaining low. The U.S. banking system is also deemed to be sound and resilient.
ETFs to Win
Invesco KBW Regional Banking ETF (KBWR)
A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Invesco KBW Regional Banking ETF offers exposure to companies primarily engaged in U.S. regional banking activities and follows the KBW Nasdaq Regional Banking Index. Holding 52 stocks in its basket, it is a relatively less-popular and less-liquid option in the space, with AUM of $65.4 million and an average daily volume of 16,000 shares (see: Regional Bank ETFs: Value Play or Value Trap?).
Invesco KBW Regional Banking ETF charges 35 bps in fees per year from investors and has a Zacks ETF Rank #2 (Buy).
Vanguard Consumer Discretionary ETF (VCR)
Higher interest rates usually indicate a healthy economy, leading to greater consumer power. An improving economy coupled with higher consumer confidence will make the consumer discretionary sector tempting to investors amid higher yields. Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 308 stocks in its basket. In terms of industrial exposure, broadline retail and automobile manufacturers occupy the top spots with double-digit exposure each (read: 5 ETFs to Ride on Soaring 2-Year High Consumer Sentiment).
Vanguard Consumer Discretionary ETF is a low-cost choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 82,000 shares a day. The fund has managed about $5 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Invesco DB US Dollar Index Bullish Fund (UUP)
Rising interest rates will pull in more capital into the country and lead to an appreciation of the U.S. dollar. Invesco DB US Dollar Index Bullish Fund is the prime beneficiary of a rising dollar as it offers exposure against a basket of six world currencies — euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities.
Invesco DB US Dollar Index Bullish Fund has so far managed an asset base of $560.1 million while seeing an average daily volume of around 2 million shares. It charges 77 bps in total fees and expenses and has a Zacks ETF Rank #2 with a Medium risk outlook.
SPDR Gold Trust ETF (GLD)
Gold is experiencing a surge again after a significant decline in recent months on hopes that the Fed will put an end to tightening policy. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion. An end to the rate hikes will provide support to the yellow metal. Therefore, products tracking this bullion, like SPDR Gold Trust ETF, will gain. It tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA.
SPDR Gold Trust ETF is an ultra-popular gold ETF with an AUM of $58 billion and a heavy volume of about 6 million shares a day. It charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares MSCI Emerging Markets ETF (EEM)
A rate hike will pull out more capital from the emerging markets, stirring up concerns for most nations, while a dovish view can raise the appeal for the stocks and ETFs in these nations. The most popular emerging market ETF — iShares MSCI Emerging Markets ETF — tracks the MSCI Emerging Markets Index and charges 69 bps in annual fees from investors. It holds 1,243 securities and has an AUM of $24.2 billion.
iShares MSCI Emerging Markets ETF trades in an average daily volume of around 28 million shares and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.
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SPDR Gold Shares (GLD): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports
Vanguard Consumer Discretionary ETF (VCR): ETF Research Reports
Invesco KBW Regional Banking ETF (KBWR): ETF Research Reports
