Fed Speeds Up Taper Plans: Sector ETFs To Gain

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In the FOMC meeting, the Federal Reserve signaled a more aggressive unwinding of its pandemic-era monthly bond-buying, setting the stage for three interest rates hikes in 2022 to fight inflation.

Against such a backdrop, investors should focus on sectors that will benefit the most from the Fed’s tightening policy. Some ETFs like Financial Select Sector SPDR Fund (XLF - Free Report), Vanguard Consumer Discretionary ETF (VCR - Free Report), Technology Select Sector SPDR Fund (XLK - Free Report), and Invesco DWA Basic Materials Momentum ETF (PYZ - Free Report) look to be excellent choices to play the trend.

Fed Meet in Focus

The central bank plans to buy $60 billion per month of bonds in combined Treasuries and agency mortgage-backed securities starting in January, down from $90 billion in December and $120 billion from the start of the pandemic through November.

The speedy tapering came amid inflation, solid job gains in the recent months, and a declining unemployment rate. Inflation is the hottest in nearly four decades. The consumer price index (“CPI”) jumped 6.8% year over year in November, the highest level since June 1982 when inflation hit 7.1%. The economy is nearing full employment, with the unemployment rate dropping to a pandemic-era low of 4.2%.

The central bank raised its inflation outlook for 2021 and 2022. It expects inflation to rise 5.3% in 2021, up from the previous forecast of 4.2%, and 2.6% in 2022, up from 2.2% issued in September. The meeting projections revealed that 12 out of 18 FOMC members expect at least three rate increases next year. This marks an increase from September’s forecast, where half of the Fed members saw at least one hike in 2022.

Per the CME Group's FedWatch tool, the odds for a rate hike in May of next year have increased to 59.9% from 35% at the beginning of November.

Here, we have discussed the ETFs in detail:


The financial sector will be a major beneficiary of a rising interest rate environment. This is because a steepening yield curve would bolster profits for banks, insurance companies, discount brokerage firms and asset managers. A broad way to play this trend is with Financial Select Sector SPDR Fund, which has a Zacks ETF Rank #1 (Strong Buy) with a Medium-risk outlook.

Financial Select Sector SPDR Fund is the most popular financial ETF in the space with AUM of $42.9 billion and an average daily volume of about 52.6 million shares. The fund follows the Financial Select Sector Index, holding 65 stocks in its basket. In terms of industrial exposure, banks take the top spot at 37.4% while capital markets, insurance, and diversified financial services make up for double-digit exposure each. Financial Select Sector SPDR Fund charges 12 bps in annual fees.

Consumer Discretionary

Consumer discretionary stocks also seem good bets. This is because a tight policy is seemingly the result of a pickup in economic growth supported by solid job growth, wage growth and increased lending activity that result in higher spending power. Vanguard Consumer Discretionary ETF, which has a Zacks ETF Rank #1 with a Medium-risk outlook, can be an exciting pick.

Vanguard Consumer Discretionary ETF follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 304 stocks in its basket. In terms of industrial exposure, Internet & direct marketing retail, automobile manufacturers and home improvement retail occupy the top spots with double-digit exposure each. Vanguard Consumer Discretionary ETF is the low choice in the space, charging investors only 10 bps in annual fees while volume is good at nearly 122,000 shares a day. The fund has managed about $7.3 billion in its asset base so far.


In a tight policy era, technology seems one of the safest sectors as most of the 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. While there are several ETFs to bet on, Technology Select Sector SPDR Fund could be an intriguing option. The fund has a Zacks ETF Rank #1 with a Medium-risk outlook.

Technology Select Sector SPDR Fund targets the broad technology sector and follows the Technology Select Sector Index. It holds about 76 securities in its basket with key holdings in software, technology hardware, storage & peripherals, semiconductors & semiconductor equipment, and IT services. Technology Select Sector SPDR Fund is the most popular and heavily traded ETF with AUM of $51.4 billion in AUM and an average daily volume of 10.5 million shares. The fund charges 12 bps in fees per year.


Tight policy means solid economic growth, which in turn results in higher demand for materials. Invesco DWA Basic Materials Momentum ETF tracks the Dorsey Wright Basic Materials Technical Leaders Index, giving investors exposure to 49 stocks showing relative strength (momentum). Chemicals dominates the fund’s returns at 57.2% while metals & mining accounts for 30.9% of the portfolio.

Invesco DWA Basic Materials Momentum ETF has amassed $143.4 million in its asset base while charging 60 bps in fees and expenses. Volume is paltry as it exchanges nearly 9,000 shares in hand a day. Invesco DWA Basic Materials Momentum ETF has a Zacks ETF Rank #2 (Buy) with a High-risk outlook.

Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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