If one thing is apparent about the Fed, it is that Jerome Powell and his team are much more hawkish than Yellen or Bernanke. Therefore, it looks like rates are going to continue to rise (even in the face of a market protest, such as is occurring). With that in mind, investors need to find ways to hedge their portfolios or profit from rising rates. One area to look is at bank ETFs. Banks tend to do well as interest rates rise as the lift in rates boosts their net interest margins, a key source of revenue for the sector. Accordingly, take a look at the Financial Select Sector SPDR Fund (XLF) and the SPDR S&P Regional Banking ETF (KRE), both of which had been attracting capital. Additionally, see the First Trust Nasdaq Bank ETF (FTXO), Invesco KBW Bank ETF (KBWB), and the SPDR S&P Bank ETF (KBE).
FINSUM: Banks stocks seem to be a good buy so long as we don’t get an inverted yield curve.
Whether investors like it or not, the market seems to have finally come to grips with the reality of higher rates. That realization has started to change the performance of different assets from even a week ago. So who will win and who will lose? On the positive side, financials and banks seem likely to benefit, as they make a great deal of their income from interest. Energy and materials stock are likely to shine as well as they benefit from the expanding economy. On the losing side will be utilities, housing, and autos stocks, all of which are sensitive to higher rates in their own ways. No one can be sure how tech might respond, as the sector is young enough that there is not good evidence to say how it might react.
FINSUM: The business case for how most sectors will be impacted by higher rates is clear. If only share performance were so simple.
Rising rates are good for financials, right? Well, not always, especially for asset managers. The sector is not as directly impacted by rate rises as banks, and investors need to be on the look out for losses. The whole sector is experiencing a grave fee war, with fund pricing recently hitting zero. All managers are now in an effective race to the bottom on fees and only a handful of winners will emerge, all reliant on increasing scale massively to make the low fees viable.
FINSUM: Asset managers are in a nasty and long-term fight. The damage to shares would have been much worse, but the rise in stocks and other assets has boosted AUM, which has offset a lot of the lost revenue from lower fees, helping to insulate the sector.
With rates rising and yields finally responding in a big way, you may have been wondering which ETFs tend to perform well in such periods. With that in mind, here is a list of the best performing ETFs in periods of rising rates (since 2008). The stats are from thirty day periods of rising rates, which have occurred 18 times since 2008. The best four are: VanEck Vector Oil Services ETF (6.53% average gain), the SPDR S&P Regional Banking ETF (4.9%), the United States Oil Fund ETF (4.54%), and the SPDR S&P Oil & Gas Exploration & Production ETF (3%).
FINSUM: Oil and banking, not really a surprise, but certainly a good reminder for investors. The worst performing funds in the same period tended to be gold funds.
Have you heard of the new “doom loop”? The term may seem vaguely familiar, and follows in a long line of sensationalist financial terms. Just like in its origin during the European debt crisis, the term once again refers to a European state sinking under the crushing weight of its own debt. You guessed it, Italy. The doom loop refers to the European bank habit of loading up on sovereign bonds, and in turn creating a negative reinforcment cycle where bonds fall in value, which leads to serious concerns over a bank meltdown, which then exacerbate the original economic fears. That is exactly what is now occurring after Italian bonds sold off steeply following the country’s wild budget approval.
FINSUM: Italy is one of the very largest debt markets and economies in the world, and a full scale meltdown there would surely impact global markets, even the Teflon-coated US stock market.