ETFs To Win And Lose As Third Rate Hike Looms

All eyes are currently on the crucial two-day FOMC meeting (starting today) as the central bank is highly anticipated to raise interest rates for the third time this year by 25 bps. This would also mark the eight rate hike since December 2015. The Fed is also on track for the fourth hike in December.

Per the CME Group’s FedWatch Tool, interest rate futures traders are fully pricing in a third rate increase at the September meeting, while the probability of an additional hike in December rose to 72%.

Growing inflationary pressure and an improving economy is compelling the Fed for aggressive rates hike. In the latest Fed minutes, the Federal Open Markets Committee (FOMC) provided an upbeat view of the economy, solidifying chances of a rate hike at the September meeting.

The U.S. economy is witnessing the fastest pace of growth in nearly four years and the labor market has been on an expansionary mode, adding jobs for 95 consecutive months — the longest growth streak. Additionally, Americans continue to be optimistic as evident from 18-year high consumer confidence in August. Tax cuts and increased government spending are spurring growth.

However, the positive effects are expected to fade next year thanks to Trump’s trade protectionism policy. The escalation in trade war fears will raise consumer prices for key goods and supplies, potentially hampering growth. As such, the Fed might slow down its rate hikes in 2019.

Given this, several ETFs are in focus and could see outsized volume, depending on the upcoming Fed decision. A few ETFs will continue to benefit if the Fed raises rates as expected, while a few would be severely impacted. Let’s have a look at them:

ETFs to Win

SPDR S&P Regional Banking ETF (KRE – Free Report)

A rising interest rate scenario would be highly profitable for banks as they seek to borrow money at short-term rates and lend at long-term rates. With the rise in short-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular KRE, having AUM of $5.4 billion and average daily volume of 5.6 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 127 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.