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Play These Stocks & ETFs If Fed Acts in March

Sanghamitra Saha

When the Fed meets in mid-March, most investors would expect them to enact the third rate hike in a decade. Possibilities of a rate hike now hovers around 88%, according to CME futures trading.

The latest hawkish comments from Fed officials took the yield on 10-year U.S. Treasury note to 2.60% on March 9, 2017 from 2.45% at the start of the year. Stabilization in the global economy with the U.S. staging a steady recovery, a solid labor market and a considerable pickup in inflation led to the hawkish tone of the Fed officials (read: Doves Turn Hawks: 5 Fed-Proof Bond ETFs to Buy).

The Fed raised benchmark interest rates by a modest 25 bps to 0.50–0.75% in December 2016 for the second time after almost a decade, attesting the U.S. economy’s growth momentum and the labor market’s wellbeing, though both have room for improvement. The Fed then forecast three rate hikes in 2017.

While markets seemed to have priced in an expected Fed tightening, some investors may still remain underprepared for this reality. We thus highlight a few ETF and stock options that could be wining ones if the Fed acts soon and faster in the near term:

ETF Picks

iShares Floating Rate Bond ETF FLOT

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds.

With the strengthening prospect of a March rate hike, U.S. Treasury yields are on an uptrend. This explains why investors can bet on this floating rate bond ETF in a rising rate environment.

S&P 500 ex-Rate Sensitive Low Volatility Portfolio XRLV

With rising rate concerns prevailing in the U.S. market, XRLV could be a great pick. The product is composed of 100 stocks of the S&P 500 Index that exhibit both low volatility and low interest rate risk. Since a market rally can bring about a correction in the near term, a low volatile but still an ex-rate sensitive pick deserves a look (read: Low Volatility ETFs in Fine Fettle Despite a Bull Market).

PowerShares KBW Bank Portfolio ETF KBWB

The financial sector enjoys the seasonal tailwind in March. Plus, with the possibility of faster Fed rate hikes this year, banking stocks are likely to benefit from a rising rate environment. Major banks have already come up with strong earnings reports in the latest reporting cycle, clearing the path for the banking ETF to outperform. KBWB also has a Zacks Rank #1 (read: Will Trump & Fed Make 2017 a Year of Financials ETFs?).

Stock Picks

Farmers & Merchants Bancorp Inc. FMAO is a Zacks Rank #2 (Buy) holding company which operates as a locally owned and operated community bank serving Northwest Ohio and Northeast Indiana. It has a dividend yield of 2.01%. The Zacks industry rank is in the top 7% and the Zacks sector rank is in the top 31%.

ZAGG Inc ZAGG is a Zacks Rank #1 (Strong Buy) company, which manufactures and distributes protective clear coverings and accessories for consumer electronic and hand-held devices. In a rising rate environment, this kind of cyclical sector should perform well. The Zacks industry rank is in the top 22% and the Zacks sector rank is in the top 25%. ZAGG has a VGM score of ‘A.’

Telefonica SA TEF is a Zacks Rank #1 company. It is the largest supplier of telecommunications services in the Spanish and Portuguese speaking world. The Zacks industry rank is in the top 35% and the Zacks sector rank is in the top 50%. The company has a VGM score of ‘A.’ The stock yields about 7.16% annually (as of March 9, 2017), offering way more than the current benchmark U.S. Treasury yield.

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Telefonica SA (TEF): Free Stock Analysis Report
 
Farmers & Merchants Bancorp Inc. (FMAO): Free Stock Analysis Report
 
ZAGG Inc (ZAGG): Free Stock Analysis Report
 
ISHARS-FL RT BD (FLOT): ETF Research Reports
 
PWRSH-SP5 XRATE (XRLV): ETF Research Reports
 
PWRSH-KBW BP (KBWB): ETF Research Reports
 
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