Based on economic data and what the Federal Reserve Committee members have been saying over the past few weeks, it would appear the US Central Bank is ready to increase interest rates for the first time since 2006. The Fed has held the benchmark rate near zero since 2008 to help spur economic growth. But with the US economy moving forward, the days of cheap money may be numbered.
I recently wrote about why I believe the Fed will raise rates at the December Fed meeting so today I would like to point out a few industries that could benefit from a rate increase and some ETF'S that focus on those industries.
Financials/Banks – Lenders
The idea behind the banks, well those lending money, will perform well if the Fed raises rates is simply; the lenders borrow money and loan it out at a higher rate. When rates are high or rising, the lender can increase the spread or difference between what they are borrowing the money for and what they are lending it out at.
There are currently 10 ETF’s that focus on banks as a niche. A few of the ones that pop out to me are the SPDR S&P Bank ETF (KBE), the First Trust NASDAQ ABA Community Bank ETF (QABA), the ProShares Ultra S&P Regional Banking ETF (KRU), and the Direxion Daily Regional Banks Bull 3X ETF (DPST) and the Direxion Daily Regional Banks Bear 3X ETF (WDRD).
As for performance the KBE, KRU, and QABA are all up more than 7% over the last 30 days, up 0.6%, 5.4% and 4.85% respectively over the last three months, and have risen 9.73%, a market crushing 22.94%, and 15.64% over the past year. Over the past month, the S&P 500 is up 2.49%, up 2.24% over 3 months, but up just 0.89% over the past year.
As for the Bull and Bear Direxion ETF’s, the Bull 3X is up 20.37% over the last 30 days while the Bear 3X is down 21.08%. The funds have a recent inception date, so that is all the data we have on them, but due to their leveraged position, if the Fed does raise rates, the Bull or DPST could be a really big winner.
Insurance
The way an insurance company makes its money is not from the premium you pay, but from the investment returns they make. What happens is they take your premium and invest the money until the day you make a claim. At that point, they sell the investment and give you your money back. The money they make from that investment is their profit. Now this happens on a much larger scale, with pools of money, not just your few hundred dollars being put into an account, but that is the main idea. So when rates are low, safe bond investments don’t return a large profit. But when rates go higher, safe bond and US Treasury yields grow, making an insurance company’s profits get larger.
Currently, there are four insurance ETF’s; SPDR S&P Insurance ETF (KIE), iShares U.S. Insurance ETF (IAK), PowerShares KBW Insurance ETF(KBWI) and the PowerShares KBW Property & Casualty Insurance ETF (KBWP). It should also be noted that KBWP focuses solely on Property and Casualty Insurance companies while the others invest in the broader insurance industry as a whole.
None of the ETF’s in this space are large in terms of assets under management, the largest being KIE with just over $615 million, but that shouldn’t scare investors off because these ETF’s hold the big names in the insurance industry. Names like Progressive, ACE, Travelers, Allstate, Aflac, AIG, MetLife, Prudential and Chubb are all found in the lists of these ETF’s top ten holding.
But what’s impressive about this industry, is its performance. KIE is up 2.59% over the last month, down 0.76% over three months, but up 11.56% over the past year. IAK is up 4.08% over the last month, down 0.64% for the three months and up 9.68% during the last year. But, the most impressive is KBWP posting an 18.04% gain over the last year.
Consumer Discretionary
While this idea may be a little controversial, it is still worth pointing out that consumer discretionary stocks should perform well during a time when the Federal Reserve is raising interest rates. The thinking is that when the economy is strong enough for the Fed to raise rates, consumers will be confident enough to spend a little more and save a little less, helping consumer discretionary stocks. Also, more people will be working, meaning there are more consumers who can afford to spend on discretionary goods. Whether this is how it will play out is unknown, but let’s take a look at which ETF’s could benefit if that is how it plays out.
PowerShares Dynamic Leisure and Entertainment ETF(PEJ), PowerShares Dynamic Media ETF (PBS), SPDR S&P Retail ETF (XRT), and if you are looking for a leveraged ETF the Direxion Daily Retail Bull 3X ETF (RETL) should do the job for you. From a performance standpoint, this group is all across the board but that’s likely due to the many different niche industries within the consumer discretionary segment that this group of ETF’s represents.
For example, PBS holds Facebook, Alphabet, Disney, Sirius-XM all in its top five holdings. PEJ has American Airlines, Disney, Delta, Expedia, and Starbucks in its top five holdings. XRT’s top five look like this; Wayfair, Liberty TripAdvisor Holdings, Pep Boys, TripAdvisor, and Zumiez. Despite all the ETF’s representing consumer discretionary stocks, the actual holdings of each ETF are very different looking. Investing trying to take advantage of a Fed interest rate move helping this industry will need to be very specific about what they buy.
Check back soon for a few industries and ETF’s that will be punished when the Fed raises rates.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold shares of any company mentioned above. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
