June Rate Hike In The Cards: ETFs To Win & Lose

All eyes are currently on the crucial two-day FOMC meeting (started Tuesday) as the US central bank is highly anticipated to raise interest rates for the second time this year by 25 bps. Per CME group, the odds of a June rate hike are 96%. This would also mark the seventh rate hike since December 2015.

Investors are also keenly waiting for the Fed’s guidance on the future rate trajectory. Currently, the Fed forecasts a total of three rates hike for this year. Growing inflationary pressure and improving economy could compel the Fed to add one more rate hike in its forecast for this year. Notably, the Consumer Price Index rose 0.2% in April, bringing the annual inflation (12 months through April) to 2.5% - the biggest gain since February 2017 and well above the Fed’s 2% target. Unemployment also dropped to 3.8%, the lowest level since 2000.

The economy has expanded for nine years and the United States has now entered its second-longest expansion phase since 1785. However, many experts caution against the fourth rate hike and expect the Fed to leave its future rate forecast unchanged, thanks to tariff and trade threats that could hamper global growth.

A surprise could be in store as the Fed may signal an early exit from its history-making program to reduce the level of bonds on its balance sheet.

Given the fact that a ratei ncrease is widely expected in the meeting, several ETFs are poised to gain or lose on the upcoming Fed decision. Further, the future rate trajectory will also have an influence on these funds. Let’s have a look:

ETFs to Win

SPDR S&P Regional Banking ETF (KRE - Free Report)

A rising interest rate scenario would be highly profitable for banks 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 would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits. In particular, the ultra-popular KRE, having AUM of $5.3 billion and average daily volume of 6.3 million shares, will benefit the most. The product follows the S&P Regional Banks Select Industry Index, holding 120 securities and charging investors 35 basis points a year in fees. It has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

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