3 ETFs to Benefit as Faster Rate Hike Worries Cool Down

The United States economy added more jobs than expected in February. However, wage growth slowed in the period, which led analysts to bet on gradual rate hikes by the Fed. As a result, multiple analysts argue that current concerns regarding the potential impact of high wage growth are being blown out of proportion and the market can take relief from possibilities that interest rates will not be hiked four times this year.

Into the Headlines

The U.S. economy added 313,000 jobs in February — the highest since July 2016 — compared with a Reuters forecast of 200,000. However, this was not enough to make market pundits believe that the Fed will perhaps go on an aggressive rate hiking spree, as wage growth remained tepid.

Moving on to wages, average hourly earnings in the United States grew a mere 0.1% in February compared with 0.3% in the previous month. The February data showed a drop from the year-over-year increase in average hourly earnings to 2.6% from 2.8% in January.

“A strong jobs report with less wage inflation tells the market that current concern about the wage issue is overblown,” per a New York Times article citing Jonathan Golub, chief United States equity strategist at Credit Suisse. He added, “The market has to think that is terrific.”

In February, the S&P 500 entered the correction territory as strong wage growth in January made investors bet on aggressive rate hikes by the Fed. However, the recent weakness in that line has introduced some calm with respect to faster-than-expected rate hikes. Per a Market Watch article, CME’s Fed watch tool predicts three rate hikes for the year and that there is a 35% probability of four hikes in 2018.

Let us now discuss a few ETFs that are likely to benefit if the Fed adopts a gradual rate hike stance (read: Here's Why Short-Term Muni Bond ETFs Might Seem Appealing).

iShares Core S&P 500 ETF IVV

This fund is a low-cost ETF that seeks to provide exposure to large established U.S. companies and tracks the S&P 500 index. The overall domestic market is expected to benefit from a gradual pace in rate hikes, as aggressive rate hikes increase borrowing costs and weigh on business activity (read: 4 Sector ETFs That Crushed S&P 500 in 9-Year Bull Run).

It has AUM of $159.8 billion and charges a fee of 4 basis points a year. From a sector look, the fund has high exposure to Information Technology, Financials and Health Care with 25.2%, 15.0% and 13.7% allocation, respectively. The fund’s top three holdings are Apple Inc AAPL, Microsoft Corporation MSFT and Amazon.com Inc AMZN with 3.9%, 3.1% and 2.6% allocation, respectively. The fund has returned 20.1% in a year. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

First Trust Asia Pacific ex-Japan AlphaDEX Fund FPA

This fund seeks to provide exposure to the Asian equity markets excluding Japan. It has AUM of $63.4 million and charges a fee of 80 basis points a year. Asian markets are poised to gain if the Fed slows rate hikes, as aggressive rate hikes by the Fed lead to capital outflows from the Asian continent and disruption in the currency markets.

From a geographical perspective, the fund has high exposure to South Korea, Hong Kong and Australia, with 37.3%, 31.7% and 19.8% exposure, respectively. From a sector look, the fund has top exposure to Real Estate, Consumer Discretionary and Materials, with 22.5%, 16.4% and 14.7% allocation, respectively.  The fund has returned 29.6% in a year. It has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Core MSCI Emerging Markets ETF IEMG

This fund provides exposure to emerging market equities. Emerging markets might gain in case the Fed goes slow on rate hikes, as these investments fall out of favor when the Fed speeds up policy tightening. This is primarily because a reduction in the interest rate differential between the United States and emerging markets reduces the attractiveness of the latter.  

It has AUM of $49.3 billion and charges a fee of 14 basis points a year. From a geographical perspective, it has 29.1% exposure to China, 14.9% to South Korea and 12.1% to Taiwan. Technology, Financials and Consumer Discretionary are the top three sectors of the fund, with 26.5%, 22.0% and 10.7% allocation, respectively. Tencent Holdings, Samsung Electronics Ltd and Alibaba Group Holding are the top three holdings of the fund, with 5.0%, 3.4% and 3.4% allocation, respectively. The fund has returned 34.5% in a year. IEMG has a Zacks ETF Rank #3 with a Medium risk outlook.

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