3 Top Ranked Sector ETFs To Buy As Fed Hikes Rates

The financial sector is attracting a lot of investor attention lately. After President Donald Trump passed the tax reform last year, analysts are highly optimistic about the financial sector’s performance owing to recent trends in the sector (read: 4 Top Ranked Financials ETFs for Your Portfolio).

The Fed hiked interest rates by 25 basis points for the sixth time since it started going on an upward trajectory in December 2015. Higher interest rates are known to be a positive for the financial sector and strong job growth may drive consumer spending higher. Moreover, the tech sector is another sector every investor flocks to during periods of rising rates, owing to their low debt commitments.

Cause for Appeal

Per data released by the Labor Department, the U.S. economy added 313,000 jobs in February, the most since July 2016. Moreover, the jobless rate remained at 4.1%, a 17-year low. In the most recent FOMC meet, the committee of central bankers led by Jerome Powell increased the 2018 GDP forecast for the U.S. economy to 2.7% from 2.5% in December.

Moving on to interest rates, The Federal Reserve hiked interest rates by 25 basis points in Powell’s first meeting as chairman. The new benchmark funds rate was increased to a target of 1.5% to 1.75%. "The economic outlook has strengthened in recent months," the committee said in its post-meeting statement, inviting speculation of a steeper path in rate hikes going forward in 2019 and 2020.

Rate hikes are particularly positive for financial stocks, as it leads to an increase in the prime rates, at which banks lend to customers.

Moving on to discretionary stocks, these are cyclical and an improving employment scenario makes consumers more likely to spend beyond the necessities. As a result, consumer-discretionary stocks might see a rise, as strong job growth drives consumer confidence higher. Conference Board's measure of consumer confidence increased to 130.8 in February compared with downwardly revised 124.3 in the prior month, the highest since November 2000.

Coming to technology funds, low debt requirements to finance expenses might help the tech sector outperform the others. Developments in the virtual reality and artificial intelligence space have given a boost to this sector. Although the recent Facebook debacle and slower acquisitions have weighed on the tech sector, continued strength in global spending might prove positive for stocks in this sector (read: Are FB & EU Casting Cloud Over Silicon Valley and These ETFs?).

Let us now discuss a few ETFs focused on providing exposure to the discussed sectors.

Financial Select Sector SPDR Fund XLF

This fund seeks to provide exposure to financial stocks in the U.S. equity markets. It has AUM of $32.7 billion and charges a low fee of 13 basis points a year.

The fund’s top three holdings are Berkshire Hathaway (NYSE:BRKa) Inc Class B BRKB, JPMorgan Chase & Co (NYSE:JPM) and Bank of America Corp (NYSE:BAC) with 11.4%, 11.4% and 8.8% allocation, respectively. The fund has returned 23.8% in a year and 3.3% year to date. XLF has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

Consumer Discretionary Sector SPDR Fund XLY

This fund seeks to provide exposure to consumer discretionary stocks and tracks the Consumer Discretionary Select Sector Index. It has AUM of $13.5 billion and charges a low fee of 13 basis points a year.

The fund’s top three holdings are Amazon.com Inc (NASDAQ:AMZN) , Home Depot Inc (NYSE:HD) and Comcast Corp A (NASDAQ:CMCSA) with 21.6%, 7.1% and 5.4% allocation, respectively. The fund has returned 22.9% in a year and 6.1% year to date. XLY has a Zacks ETF Rank #1, with a Medium risk outlook.

Technology Select Sector SPDR Fund XLK

XLK is a relatively cheaper bet on the technology sector. This fund has AUM of $21.7 billion and charges a fee of 13 basis points a year. The fund has 13.9% exposure to Apple Inc (NASDAQ:AAPL) , 11.4% to Microsoft Corp (NASDAQ:MSFT) and 6.5% to Facebook Inc (NASDAQ:FB) . The fund has returned 30.7% in a year and 6.3% year to date. XLK has a Zacks ETF Rank of #2 (Buy), with a Medium risk outlook.

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