All eyes are currently on the crucial two-day FOMC meeting (slated to start on Mar 21) to see whether the hawkish central bank will go for a 50-bps hike or a smaller one or a halt following the latest crunch in the financial sector.
Several ETFs are in focus and can see outsized volume, depending on the upcoming Fed decision. A few ETFs — including SPDR S&P Regional Banking ETF KRE, Vanguard Consumer Discretionary ETF VCR, Invesco DB US Dollar Index Bullish Fund UUP, SPDR Gold Trust ETF GLD and iShares MSCI Emerging Markets ETF EEM — are in focus.
It has been a year since the Fed started its fastest rate-hiking campaign since the 1980s and enacted the first of the eight interest rate increases to arrest stubborn inflation. Since then, inflation, as measured by the consumer price index, has come down from 8.5% annual growth to 6% currently. However, it is still short of the Fed’s 2% target (read: Inflation Cools Down in February: ETFs to Consider).
According to market pricing and Wall Street experts, the Fed will likely approve a quarter-percentage-point interest rate increase this week. A rate increase will come following an emergency lending facility to halt a crisis of confidence in the banking industry.
Then again, some high-profile experts project that the Fed will not only halt its aggressive rate hikes amid the banking crisis but also cut rates altogether. Economists at Nomura expect the Fed to reverse its aggressive tightening policy and cut the benchmark interest rate by 25 basis points at its meeting next week amid the banking crisis. The CME FedWatch tool now predicts a 62.7% chance of a 25-bps rate increase and a 37.3% chance of the Fed completely forgoing a rate hike this month.
The recent collapse of three banks — Silicon Valley Bank, Silvergate and Signature Bank — has knocked confidence in the financial industry and stoked worries that depositors are pulling their funds and harming bank liquidity. This has stirred memories of the 2008 financial crisis.
Republic Bank FRC has also been on a downfall over the past week despite a rescue package with $30 billion in deposits injected by large U.S. banks. Meanwhile, Credit Suisse Group CS plunged to an all-time low after its largest shareholder ruled out any more investment in the bank. Though UBS Group UBS has agreed to acquire the crisis-hit Credit Suisse in an emergency rescue deal, it is unable to lift the sentiments. Shares of Credit Suisse plunged further about 51% in the early trading today.
The series of bank failures led to significant rescue efforts by the Federal Deposit Insurance Corp. and the Federal Reserve to prevent a crisis similar to what occurred in 2008. This has drawn a record amount of funds from the Fed’s emergency facilities, including a new funding backstop, and has sparked fears of a broader credit crunch and liquidity strains across the broad market.
ETFs in Focus
SPDR S&P Regional Banking ETF (KRE)
A rise in interest rates can lend some support to the crisis-hit baking stocks 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 will be able to earn more on lending and pay less on deposits. This will expand net margins and bolster banks’ profits. In particular, the ultra-popular SPDR S&P Regional Banking ETF will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 142 securities in its basket (read: 5 Most Heavily Shorted ETFs So Far This Year).
SPDR S&P Regional Banking ETF has an AUM of $3.2 billion and charges 35 bps in annual fees. It trades in an average daily volume of 14 million shares and has a Zacks ETF Rank #4 (Sell) with a High risk outlook.
Vanguard Consumer Discretionary ETF (VCR)
Higher interest rates usually indicate a healthy economy, leading to greater consumer power. An improving economy, coupled with higher consumer confidence, will make the consumer discretionary sector tempting to investors. Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 308 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail and automobile manufacturers occupy the top spots, with double-digit exposure each.
Vanguard Consumer Discretionary ETF is the low-cost choice in the space, charging investors only 10 bps in annual fees, while volume is good at nearly 88,000 shares a day. The fund has managed about $4 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: 4 Top Sector ETFs to Gain as Fed Signals Faster Rate Hikes).
Invesco DB US Dollar Index Bullish Fund (UUP)
Rising interest rates will pull more capital into the country and lead to an appreciation of the U.S. dollar. Invesco DB US Dollar Index Bullish Fund 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.
Invesco DB US Dollar Index Bullish Fund has so far managed an asset base of $1.2 billion, while seeing an average daily volume of 3.3 million shares. It charges 77 bps in total fees and expenses, and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
SPDR Gold Trust ETF (GLD)
Gold topped $2,000 for the first time in a year as the bank crisis continues. If the Fed does not raise rates, the yellow metal will rally further as it will increase the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. Therefore, products tracking this bullion, like SPDR Gold Trust ETF, will gain. It tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. SPDR Gold Trust ETF is an ultra-popular gold ETF with an AUM of $56.6 billion and a heavy volume of about 6 million shares a day.
SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares MSCI Emerging Markets ETF (EEM)
A rate hike will pull out more capital from the emerging markets, stirring up concerns for most nations, while a halt can raise the appeal for the stocks and ETFs in these nations. The most popular emerging market ETF — iShares MSCI Emerging Markets ETF — tracks the MSCI Emerging Markets Index and charges 69 bps in annual fees from investors. It holds 1,228 securities and has an AUM of $23.6 billion.
iShares MSCI Emerging Markets ETF trades in an average daily volume of around 34 billion shares and has a Zacks ETF Rank #4 with a Medium risk outlook.
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