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Fed Likely to Raise Rates Today: 6 ETFs On The Move
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The ongoing two-day FOMC meeting is concluding later today and anticipation surrounding its outcome is sky-high. The Fed seems on its way to raise interest rates for the second time in 10 years given the string of solid data and Trump fueled economic optimism. Per the latest poll by CME Group, there is a 97% probability that the Fed will raise rates today by a quarter percentage points. The Fed funds’ futures market shows a 100% chance of liftoff.
Additionally, investors are keenly waiting for the Fed’s guidance on the future rate trajectory. Many analysts are expecting two rate hikes next year while a WSJ poll shows that the Fed will raise interest rates three times next year, suggesting a faster-than-expected tightening path by the central bank.
This is especially true, as the U.S. economy expanded 3.2% in the third quarter, representing the strongest growth in two years while unemployment dropped to a nine-year low of 4.6%. Inflation saw its biggest increase in six months in October. Further, consumer confidence rose to the highest level since July 2007 in November as per the report from the New York-based Conference Board.
Moreover, President-elect Donald Trump’s expansive stimulus plan and a recent OPEC decision to cut oil production to support prices could indicate higher inflation and faster rate increases in the coming years (read: How to Bet on Oil with Leveraged ETFs).
Given the positive developments and improving fundamentals, rate increase is widely expected in the meeting. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those:
A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having AUM of $3.3 billion and average daily volume of 6.3 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 97 securities in its basket, the fund is widely spread out across components with none holding more than 5%. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook (read: Trump Effect Elevated These Sector ETFs to Rank #1).
PowerShares DB US Dollar Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP 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. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $825 million while sees an average daily volume of around 1.7 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Bet on the Rising Dollar with These ETFs).
iPath US Treasury Steepener ETN
As yield rises, bonds and related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 14,000 shares a day. Additionally, it is an unpopular bond ETF with AUM of just $5.1 million.
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $31.9 billion and average daily volume of around 11 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook (read: ETFs in Focus on Rate Hike Hopes Following Fed Minutes).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in in the high yield bond space with AUM of $17.9 billion and average daily volume of more than 13.2 million shares. It charges 50 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,040 securities in the basket. Effective duration and average maturity came in at 3.93 and 4.49 years, respectively. The ETF has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (see: all the High Yield Bond ETFs here).
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.73% of assets but is tilted toward the financial sector at 26.7%, followed by information technology (22%). Among the emerging countries, China takes the top spot at 25.9% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has AUM of $26.7 billion and a Zacks ETF Rank of 3 with a Medium risk outlook (read: ETF Winners & Losers as Dollar Hits 13-Year High).
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Fed Likely to Raise Rates Today: 6 ETFs On The Move
The ongoing two-day FOMC meeting is concluding later today and anticipation surrounding its outcome is sky-high. The Fed seems on its way to raise interest rates for the second time in 10 years given the string of solid data and Trump fueled economic optimism. Per the latest poll by CME Group, there is a 97% probability that the Fed will raise rates today by a quarter percentage points. The Fed funds’ futures market shows a 100% chance of liftoff.
Additionally, investors are keenly waiting for the Fed’s guidance on the future rate trajectory. Many analysts are expecting two rate hikes next year while a WSJ poll shows that the Fed will raise interest rates three times next year, suggesting a faster-than-expected tightening path by the central bank.
This is especially true, as the U.S. economy expanded 3.2% in the third quarter, representing the strongest growth in two years while unemployment dropped to a nine-year low of 4.6%. Inflation saw its biggest increase in six months in October. Further, consumer confidence rose to the highest level since July 2007 in November as per the report from the New York-based Conference Board.
Moreover, President-elect Donald Trump’s expansive stimulus plan and a recent OPEC decision to cut oil production to support prices could indicate higher inflation and faster rate increases in the coming years (read: How to Bet on Oil with Leveraged ETFs).
Given the positive developments and improving fundamentals, rate increase is widely expected in the meeting. That being said, several ETFs are in focus on the upcoming Fed decision. A few ETFs will be rewarded if the Fed raises rates or signals a hawkish outlook while a few will be severely impacted. Let’s have a look to those:
ETFs to Gain
SPDR S&P Regional Banking ETF (KRE - Free Report)
A rising interest rate scenario would be highly profitable for the financial sector as a whole. This is because the steepening yield curve would bolster profits for banks, insurance companies and discount brokerage firms. In particular, the ultra-popular KRE, having AUM of $3.3 billion and average daily volume of 6.3 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 97 securities in its basket, the fund is widely spread out across components with none holding more than 5%. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a High risk outlook (read: Trump Effect Elevated These Sector ETFs to Rank #1).
PowerShares DB US Dollar Bullish Fund (UUP - Free Report)
Rising interest rates will pull in more capital into the country and lead to appreciation of the U.S. dollar. UUP 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. In terms of holdings, UUP allocates nearly 57.6% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $825 million while sees an average daily volume of around 1.7 million shares. It charges 80 bps in total fees and expenses, and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook (read: Bet on the Rising Dollar with These ETFs).
iPath US Treasury Steepener ETN
As yield rises, bonds and related ETFs fall. But this product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts. The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 14,000 shares a day. Additionally, it is an unpopular bond ETF with AUM of just $5.1 million.
ETFs to Lose
SPDR Gold Trust ETF (GLD - Free Report)
Gold will be hit hard as higher interest rates would diminish the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. So, products tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $31.9 billion and average daily volume of around 11 million shares a day. Expense ratio came in at 0.40%. The fund has a Zacks ETF Rank of 3 with a Medium risk outlook (read: ETFs in Focus on Rate Hike Hopes Following Fed Minutes).
iShares iBoxx $ High Yield Corporate Bond ETF (HYG - Free Report)
The high yield corner of the fixed income world is the most watched area ahead of the Fed meeting. This is because higher rates would raise yields on the Treasury notes, thereby fading the sole lure of the high-yield bonds. HYG is the largest and most liquid fund in in the high yield bond space with AUM of $17.9 billion and average daily volume of more than 13.2 million shares. It charges 50 bps in fees per year from investors. The fund tracks the Markit iBoxx USD Liquid High Yield Index and holds 1,040 securities in the basket. Effective duration and average maturity came in at 3.93 and 4.49 years, respectively. The ETF has a Zacks ETF Rank of 4 or ‘Sell’ rating with a High risk outlook (see: all the High Yield Bond ETFs here).
iShares MSCI Emerging Markets ETF (EEM - Free Report)
A rate hike would pull out more capital from the emerging markets, stirring up concerns for most nations. The most popular emerging market ETF – EEM – tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors. Holding 846 securities, the product is widely spread out across various securities with none holding more than 3.73% of assets but is tilted toward the financial sector at 26.7%, followed by information technology (22%). Among the emerging countries, China takes the top spot at 25.9% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has AUM of $26.7 billion and a Zacks ETF Rank of 3 with a Medium risk outlook (read: ETF Winners & Losers as Dollar Hits 13-Year High).
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>