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The hotter-than-expected inflation has put focus on Fed’s upcoming action in the meeting next week. Though the central bank is expected to hike rates by 75 bps, the latest data raised the bets for a longer-than-expected aggressive rate hike policy.

Given this, investors should focus on areas/sectors that will benefit the most from the Fed’s tightening policy. ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report), Vanguard Consumer Discretionary ETF (VCR - Free Report), iShares US Technology ETF (IYW - Free Report), and iShares Core S&P U.S. Value ETF (IUSV - Free Report) from different corners of the market seem compelling picks.

The Federal Reserve has been on a tightening spree since the start of this year. Fed Chair Jerome Powell raised interest rates for the fourth consecutive time this year, taking the benchmark rate in the range of 2.25% and 2.5% to fight inflation. Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” to curb high inflation.

According to the latest CME Group’s FedWatch Tool data, investors are pricing an 82% chance of a 75-bps rate hike next week and an 18% chance of a full-percentage-point hike. While the tight monetary policy "for some time" will bring down inflation from its 40-year high, it means slower growth, a weaker job market, and "some pain" for households and businesses.

The initial phase of the rate increase will be good for stocks as it will reflect an improving economy, thereby benefiting cyclical sectors like financial, technology, industrials, and consumer discretionary. Banks are in the most advantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. Also, insurance companies will be able to earn higher returns on their investment portfolio of longer-duration bonds.

Higher interest rates usually indicate a healthy economy, leading to greater consumer power and increased IT spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks.

An improving economy coupled with higher consumer confidence will also make the consumer discretionary sector tempt investors amid higher yields. Further, technology seems one of the safest sectors in a tight policy era as most companies are sitting on a huge cash pile. The cash reserves will ensure that these companies are not plagued by any financial trouble, even in a rising interest rate environment.

ETFs to Win

SPDR S&P Regional Banking ETF (KRE)

SPDR S&P Regional Banking ETF provides exposure to the regional banks’ segment by tracking the S&P Regional Banks Select Industry Index. It holds 144 stocks in its basket, with each accounting for no more than 2% of the assets.

SPDR S&P Regional Banking ETF has an AUM of $3.4 billion and charges 35 bps in annual fees. It trades in an average daily volume of 5.6 million shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.   
 

Vanguard Consumer Discretionary ETF (VCR)

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 312 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 83,000 shares a day. The fund has managed $4.9 billion in its asset base so far. Vanguard Consumer Discretionary ETF has a Zacks ETF Rank #1 with a Medium risk outlook.
 

iShares US Technology ETF (IYW)

iShares Dow Jones US Technology ETF tracks the Russell 1000 Technology RIC 22.5/45 Capped Index, giving investors exposure to 147 U.S. electronics, computer software and hardware, and informational technology companies.

iShares Dow Jones US Technology ETF has an AUM of $6.8 billion and charges 39 bps in fees and expenses. Volume is good as it exchanges nearly 354,000 shares a day. IYW has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
 

iShares Core S&P U.S. Value ETF (IUSV)

iShares Core S&P U.S. Value ETF offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 741 stocks in its basket, with each accounting for no more than a 3% share. iShares Core S&P U.S. Value ETF is widely spread across sectors with health care, financials, industrials, consumer staples, and information technology occupying double-digit exposure each.

iShares Core S&P U.S. Value ETF has an AUM of $12.2 billion and trades in an average daily volume of 608,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 with a Medium risk outlook.

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