There Is No Such A Thing As A ‘Fed-Proof’ ETF

This week the topic du jour in the investment world is the pending monthly meeting of the Federal Reserve Open Market Committee, otherwise known as “The Fed”. Market watchers are split over whether this will be the big moment when the Fed decides to re-initiate a cycle of fiscal tightening. Essentially we are waiting for the Fed to lift the overnight lending rate from 0 to 0.25% or thereabouts.

The big debate of course is whether this is the perfect time to move the needle. Hawks point towards the statistically sound labor and economic data in the United States that has been trending higher for years. Doves on the other hand are firmly entrenched in worries over commodity deflation, emerging market weakness, currency instability, and tepid inflationary statistics.

Some worry that a rate increase has the potential to knock the U.S. market down even further on the heels of our first real correction since 2011. Others are concerned about the impact on Treasury yields and the trickle down effects to fixed-income, lending rates, credit cards, savings, etc…

It’s a real conundrum. But the important thing isn’t whether or not the Fed is going to raise rates. The real money will be made or lost in how the market reacts to the news.

There is the potential for swift moves in individual asset classes such as stocks, bonds, currencies, and commodities. Fixed-income markets in particular will be jittery given the fundamental link between conventional bond prices and interest rates.

Many experts have long touted the advantages of financial stocks during a period of rising interest rates. This is because it’s assumed that higher lending rates will contribute to higher margins for many of the companies that engage in investment and lending services.

The Financial Select Sector SPDR (XLF) is the largest and most well-known benchmark for this sector, with nearly $18 billion dedicated to 88 large-cap financial companies. XLF covers everything from big banks to insurance companies and REITs.