Investors are probably waiting with bated breath for the outcome ofthe crucial two-day FOMC meeting starting from Mar 20. The meeting is so important because it marks the Fed’s new chairman Jay Powell’s first meeting (read: Welcome Powell Era With These ETFs).
The new Fed Chairman provided a relatively more bullish outlook of the U.S. economy but mentioned balanced risks. Powell highlighted in his first Congressional testimony that the central bank is on its course to raise rates gradually.
As a result, some asset managers started expecting the Fed to raise U.S. overnight interest rates four times this year (more than three guided by the Fed policymakers). Though the recently-released tepid wage growth, muted inflation and soft retail sales dampened the fears of faster rate hikes lately, some market watchers still believe that this is not expected to keep the Fed from raising the funds rate by another 25 bps from the current 1.25-1.5% on Wednesday.
The CME Federal Reserve watch tool now forecasts about 28% chances for four interest rate hikes this year from the Fed, up from 13% noticed a month before (read: Financial ETFs & Stocks to Buy Post Fed Minutes)..
Per analysts, the market has already priced in more than three hikes for 2018. The yield on the two-year Treasury note hit a nine-year high. Notably, the two-year bond yield is mainly the representative of the Fed policy.
On the other hand, the 10-year benchmark U.S. treasury yield moved up to 2.85% on Mar 16, from 2.82% from the day before. All these point toward higher chances of a rate hike this month.
How to Profit If Fed Hikes?
One equity sector that directly benefits from rising rates is the financial sector. So, targeting bank stocks could be useful in this environment. Plus, talks of deregulation in the banking sector is another positive. The Q4 earnings of the financial sector was also impressive (read: Inside Q4 Earnings Performance of Banking ETFs).
While there are a number of ETFs in this corner of the market, we have highlighted those that have a solid Zacks ETF Rank #1 (Strong Buy).
SPDR S&P Bank (MX:KBE) ETF KBE
The underlyng S&P Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as banks or thrifts. Popular Inc., LendingTree Inc. and Voya Financial Inc. take top three positions in the fund. No stock accounts for more than 2.19% of the portfolio.
SPDR S&P Regional Banking ETF (CO:KRE)
The underlying the S&P Regional Banks Select Industry Index is a modified equal-weighted index that seeks to reflect the performance of publicly traded companies that do business as regional banks or thrifts. Popular Inc. (2.62%), Comerica (NYSE:CMA) Inc (2.54%) and Regions Financial Corp (NYSE:RF) (2.51%) are the three top stocks of the fund.
iShares U.S. Regional Banks ETF (LON:IAT)
The underlying Dow Jones U.S. Select Regional Banks Index is a free-float adjusted market capitalization-weighted index which measures the performance of the regional bank sub-sector of the U.S. equity market. US Bancorp (NYSE:USB) (13.67%), PNC Financial Services Group Inc (NYSE:PNC) (12.35%) and BB and T Corp (7%) are the three top holdings.
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SPDR-KBW BANK (KBE): ETF Research Reports
SPDR-KBW REG BK (KRE): ETF Research Reports
ISHARS-US RG BK (IAT): ETF Research Reports
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Zacks Investment Research