ETF Areas to Focus on to Tackle Fed Rate Hike Concerns

·4 min read

Wall Street has been witnessing dullness on the bourses, largely due to the rising 10-year Treasury yields. However, there are certain sectors like banking and energy that have remained strong on easing Omicron variant concerns, rising yields and steadily recovering U.S. economy from the pandemic-led slowdown.

The Federal Reserve Open Market Committee’s two-day meeting begun on Jan 25. Post the meeting, the central bank is expected to give some hint on its decision on taking a more aggressive approach to policy tightening in 2022, considering the consistently hot inflation levels.

The coronavirus vaccine rollout is gradually helping control the spread of the outbreak across the globe. The optimism surrounding the gradual reopening of global economies and increasing demand is painting a rosy picture for cyclical sectors. The progress in coronavirus vaccine rollout presents a strong case, favoring a faster return to normalcy and economic recovery. As the economy starts operating in full swing, banks and energy sectors will generate more business.

Let’s study the two sectors in more detail:

Banking ETFs in Focus

Several factors are working in favor of the space. The Federal Reserve has already started tapering the bond purchases, which it expects to complete by March this year. The Fed is expected to begin raising its benchmark interest rate in March. The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.

The Federal Reserve may take a more aggressive approach in raising interest rates.

Against this backdrop, let’s take a look at some banking ETFs that can gain from the current environment:

SPDR S&P Regional Banking ETF KRE

SPDR S&P Regional Banking ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Regional Banks Select Industry Index. It has AUM of $5.46 billion and charges 0.35% in expense ratio (read: 5 ETF Plays to Make the Most of Red-Hot Inflation).

SPDR S&P Bank ETF KBE

SPDR S&P Bank ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Banks Select Industry Index. It has AUM of $3.61 billion and charges 0.35% in expense ratio (read: Rotate to Cyclical Sectors With These Top-Ranked ETFs).

Invesco KBW Bank ETF KBWB

Invesco KBW Bank ETF is based on the KBW Nasdaq Bank Index. The index is a modified-market capitalization-weighted index of companies primarily engaged in U.S. banking activities. It has AUM of $3.11 billion and charges 0.35% in expense ratio (read: Banking Earnings Mixed-Bag: What's in Store for ETFs?).

Energy ETFs to Watch For

Investors are closely tracking the energy sector, which is showing strength as global demand and economic growth levels are on the path of recovery from the pandemic lows. Oil prices have been rising since the beginning of 2022. The upside in crude oil prices has been triggered by various factors like easing Omicron variant concerns, protests in Kazakhstan and outages in Libya causing supply shortages and less OPEC+ output.

Against the bullish energy sector backdrop, let’s take a look at some energy ETFs that are worth adding to your portfolio for boosting returns:

Invesco Dynamic Energy Exploration & Production ETF PXE

The fund seeks to track the performance of the Dynamic Energy Exploration & Production Intellidex Index. With AUM of $165.2 million, the fund has an expense ratio of 63 basis points (bps) (read: Energy ETFs Hitting New 52-Week High).

Vanguard Energy ETF VDE

The fund seeks to track the performance of the MSCI US Investable Market Energy 25/50 Index. With AUM of $6.83 billion, the fund charges 10 bps in fees.

The Energy Select Sector SPDR Fund XLE

The fund seeks to provide investment results, before expenses, that generally correspond to the price and yield performance of the Energy Select Sector Index. With AUM of $31.33 billion, the fund has an expense ratio of 0.12%.


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Energy Select Sector SPDR ETF (XLE): ETF Research Reports
 
SPDR S&P Bank ETF (KBE): ETF Research Reports
 
SPDR S&P Regional Banking ETF (KRE): ETF Research Reports
 
Vanguard Energy ETF (VDE): ETF Research Reports
 
Invesco KBW Bank ETF (KBWB): ETF Research Reports
 
Invesco Dynamic Energy Exploration & Production ETF (PXE): ETF Research Reports
 
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