As expected, the Fed kept the short-term interest rates steady at its two-day FOMC meeting concluded Friday but hinted at a December lift-off. The Fed stated  that it will “assess progress toward its goals of maximum employment and 2% annual inflation” in determining whether to increase the interest rates for the first time in almost a decade at its next meeting on December 15–16.

The central bank downplayed its previous expectations of global market turbulence as potential restraints to economic activity and inflation. Instead, it cited that recent headwinds are fading with substantial positive developments seen in the global economy and financial market lately. In particular, the Chinese economy is showing signs of stabilization on the back of better-than-expected GDP growth data and another rate cut while the Japanese and European central banks are taking additional stimulus measures to revive their economies (read: Time for China ETFs?).

Apart from improving global fundamentals, the U.S. economy is expanding at a moderate pace and the unemployment rate remained steady at 5.1% despite the slowing pace of job growth. Household spending and business investments have increased at solid rates in recent months while the housing sector is on track for a recovery. Adding to the strength is the diminishing underutilization of labor resources.

Immediately following the Fed comments, the odds of a December rate hike increased substantially to 47% from 34%. Given this, the financial sector seems to be a good bet, as it will be a major beneficiary of a rising interest rates environment. This is because the steepening yield curve would bolster profits for banks, insurance companies, discount brokerage firms and asset managers.

Accordingly, we have highlighted three ETFs and stocks that are expected to see smooth trading in the next couple of months and lead the market higher since the December Fed rate hike possibility is back on the table (read: Guide to the 7 Most Popular Financial ETFs).

Top Financial ETFs

While there are a number of ETFs in this corner of the market having a solid Zacks ETF Rank of 2 or ‘Buy’ rating, we have highlighted those that provide broad exposure across various industries within the segment.

Financial Select Sector SPDR Fund (XLF - ETF report)

This is by far the most popular financial ETF in the space with AUM of $17.8 billion and an average daily volume of over 35.8 million shares. The fund follows the Financial Select Sector Index, holding 90 stocks in its basket. It is heavily concentrated on the top three firms – Berkshire Hathaway (BRK-B - Analyst Report), Wells Fargo (WFC - Analyst Report) and JPMorgan Chase (JPM - Analyst Report) – which collectively make up for one-fourth of the portfolio while other firms hold less than 6% share. In terms of industrial exposure, banks take the top spot at 36.1% while insurance, REITs, capital markets and diversified financial services make up for double-digit exposure each. The fund charges 14 bps in annual fees and has added 0.2% in the year-to-date timeframe (read: SPDR Financial ETFs: What Are the Key Differences?).

Vanguard Financials ETF (VFH - ETF report)

This fund manages nearly $3.2 billion in asset base and provides exposure to a basket of 562 stocks by tracking the MSCI US Investable Market Financials 25/50 Index. The product sees solid volume of around 459,000 shares and charges 12 bps in annual fees. It is pretty well spread across each component as none of these holds more than 6.8% of assets. Bank accounts for more than one-third of the portfolio, followed by REITs (21%) and insurance (18%). The fund gained 1.6% since the start of the year.

iShares U.S. Financials ETF (IYF - ETF report)

This product follows the Dow Jones U.S. Financials Index and holds 289 stocks in its basket, which is pretty spread out across components with none holding more than 6.44% of assets. Banks take the top spot at 31% from an industrial look while diversified financial and real estate round off the top three spots with 24.6% and 21.3% share, respectively. IYF has amassed $1.5 billion in its asset base and trades in a good daily volume of about 471,000 shares per day on average. It charges an annual fee of 43 bps from investors and is up nearly 2% so far this year.

Top Financial Stocks

For stocks, we have chosen three top picks using our Zacks Stock Screener that fits our three criteria: stock Zacks Rank #1 (Strong Buy) or #2 (Buy), Growth Style Score of ‘A’ or ‘B’, and Industry Rank in the top 45%. Here are the three recommended stocks (see: all the Financial ETFs here).

SunTrust Banks Inc. (STI - Analyst Report)

Based in Atlanta, Georgia, SunTrust Banks is one of the nation's largest and strongest financial holding companies providing a wide range of services to meet the financial needs of its growing customer base.
 
Zacks Rank: #2
Growth Style Score: B
Industry Rank: Top 42%

eHealth Inc. (EHTH - Snapshot Report)

Based in Mountain View, California, eHealth offers online health insurance services in the United States and China. The company’s ecommerce platform organizes and presents health insurance information that enables individuals, families and small businesses to research, analyze, compare and purchase a range of health insurance plans (read: 4 Sector ETFs for Q4).

Zacks Rank: #2
Growth Style Score: A
Industry Rank: Top 14%

Universal Insurance Holdings Inc. (UVE - Snapshot Report)

Based in Fort Lauderdale, Florida, Universal Insurance offers an array of property and casualty insurance products via its subsidiary companies.

Zacks Rank: #1
Growth Style Score: A
Industry Rank: Top 24%