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Rate Sensitive ETFs in Focus Ahead of Fed Meeting

Sweta Killa
Investors could make a near-term bet on rate sensitive sectors in the basket form as these will continue to trade smoothly if interest rates remain steady.

All eyes are currently on the crucial two-day FOMC meeting slated to start today. The Fed is expected to hold off rates with a wait-and-see approach for the time being. Per the CME Group’s FedWatch tool, market expectations for a rate hike are at zero while options markets are currently pricing in a 98.7% chance that rates will remain unchanged and a 1.3% chance of a rate cut.

In its latest minutes, the central bank has signaled that it is not in a hurry to hike rates this year, citing mounting risks in the U.S. economy including a slowdown in Chinese and European economies and lowering benefits from 2018 tax cuts. Earlier this year, the Fed suspended a three-year movement to raise rates and stated that it will keep its short-term interest rates between 2.25% and 2.50% (read: Rate Sensitive ETFs to Explode Higher Post Fed Minutes).

Further, a separate statement issued in January also indicated that the Fed plans to be patient with its balance-sheet reduction.

The Fed’s dovish stance and dimming prospects of rate hikes at least in the near term has pushed Treasury yields lower, which in turn, is benefiting rate-sensitive and high-yield sectors, such as utilities and real estates. Additionally, global headwinds like still yet-to-be materialized trade deal, Brexit, geopolitical tensions and global growth worries are making investors jittery, raising the appeal for stocks from 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.

As a result, investors could make a near-term bet on rate sensitive sectors in the basket form as these will continue to trade smoothly if interest rates remain steady. Below, we have highlighted some ETFs from these sectors that could be excellent plays ahead of the Fed’s decision:

iShares Mortgage Real Estate ETF REM

This is the most popular mortgage REIT ETF with AUM of $1.3 billion and average daily volume of 319,000 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 35 stocks in its basket, the fund is highly concentrated on the top two firms at a combined 29.4% share while other firms make up for less than 8.4% of the assets. It charges investors 48 bps a year in fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Real Estate ETFs Hit New Highs).

Utilities Select Sector SPDR XLU

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 focused on the top firm with 11.6% 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%, closely followed by multi utilities (33%). The product charges 13 bps in annual fees and sees a heavy volume of around 19.8 million shares on average. XLU has a Zacks ETF Rank of 3 with a Medium risk outlook.

iShares U.S. Home Construction ETF ITB

This fund offers a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 47 stocks with a double-digit allocation going to the top two firms, namely DR Horton DHI and Lennar LEN. Other firms occupy not more than 9.4% of the assets. Homebuilding takes the top spot at 65.2% followed by 14% in building products and 9.9% in home improvement retail. The product has amassed $1.1 billion in its asset base and trades in heavy volume of around 3.3 million shares a day on average. It charges 43 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Homebuilder ETFs Shining Ahead of Spring Selling Season).

First Trust Consumer Staples AlphaDEX Fund FXG

This ETF provides exposure to 36 consumer staples stocks by following an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, thereby eliminating the bottom-ranked 25%. It is moderately concentrated on various components with none holding more than 6.33% share. About 55.5% of the portfolio is allocated to food & tobacco followed by food & drug retailing (20.8%), personal household products & services (16.4%) and beverages (7.2%). The fund has amassed $1.1 billion in its asset base and sees a good volume of 93,000 shares a day on average. Expense ratio comes in at 0.64%. The product has a Zacks ETF Rank  4 with a Medium risk outlook.

Global X SuperDividend U.S. ETF DIV

This fund provides exposure to the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $432.8 million in its asset base and trades in a moderate volume of about 97,000 shares. The ETF charges 45 bps in fees per year from investors. Holding 51 securities in its basket, the product is widely diversified across each component as none of these holds more than 2.3% of assets. Further, financials and utilities are the top two sectors, accounting for 26.9% and 24.7%, respectively. The product is a Zacks #3 Ranked ETF with a Medium risk outlook (read:  5 High-Dividend ETFs Available Under $15).

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