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3 Rate-Sensitive ETFs to Watch Post Fed Meeting - ETF News And Commentary

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All eyes are currently on the ongoing two-day FOMC meeting to see whether the Fed draws up its plan for the first interest rate hike in the U.S. since 2006. Investors wait anxiously as the Fed might remove the word 'patient' from its statement in describing its approach to rate hikes in this meeting even amid rising U.S. dollar and sliding oil prices .

If this happens, Fed watchers will have a good reason to expect the interest rates rise in June. This will be contrary to the Fed signals in recent meetings that even if it drops its patient stance, a rate hike anytime soon is not guaranteed. It is certainly on track to increase rates but could wait longer if the labor market falters or inflation does not pick up (read: 3 ETFs to Watch on Rising Rates ).

Interest Rates Hike Imminent

The latest job data for February reflects the resilience and confidence in the economy. This is especially true, as the U.S. added jobs at the fastest pace in 17 years last month, marking 12 straight months of sustained hiring of over 200,000 jobs. Unemployment dropped to 5.5%, the lowest rate since May 2008.

However, average hourly wage growth of 2% over the past one year has been weak. Inflation dropped to 0.5% in February, marking the fourth consecutive month of decline. Soft wage growth and inflation appears less of a concern as rising jobs will definitely revive these two areas in the coming months.

Amid global worries and geopolitical tensions, the American economy expanded at a decent 2.4% in 2014 versus 2.2% in 2013, representing the best growth since 2010. Stepped-up economic activities, rising business and consumer confidence, increasing consumer spending, and recovering housing fundamentals will continue to fuel economic growth this year. Moreover, the U.S. is on a stronger growth path and expected to drive global growth in the years ahead (read: Top-Ranked Small Cap ETFs for a Growing Economy ).

While the combination of good indicators suggest a sooner-than-expected interest rates increase, a strong dollar which is hurting exports and reducing corporate profits, and a collapse in oil prices which is raising fears of deflation are weighing heavily on this action. Given the extent of uncertainty in the timing of the interest rate hike, investors should pay close attention to the rate sensitive corner of the world.

The products in these segments could be worst hit if the Fed signals a hawkish outlook and would end up being big movers. While there are several funds that are vulnerable to rising rates, we have highlighted some of the largest and popular ones from various sectors.

iShares Mortgage Real Estate Capped ETF ( REM )

This is the most popular mortgage REIT ETF with AUM of $1.2 billion and average daily volume of less than 1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 37 securities in its basket with large allocations to the top two firms - Annaly Capital ( NLY ) and American Capital Agency ( AGNC ). These firms collectively make up for 29.7% share while other securities hold no more than 8.9% share.

The product is tilted towards small cap stocks which hold 61% of the portfolio. Mid caps take the remainder. It charges investors 48 bps a year in fees and is up just 0.2% so far in the year. The fund has a Zacks ETF Rank of 3 or 'Hold' rating with a Medium risk outlook (read: Utility/REITs ETFs Plunge on Rate Hike Speculation ).

Utilities Select Sector SPDR ( XLU )

With AUM of $6.3 billion, this fund provides exposure to a small basket of 32 securities by tracking the S&P Utilities Select Sector Index. It is concentrated on the top 10 holdings at 59.2% of assets and focuses on large cap stocks at 72% followed by mid caps. Electric utilities takes the top spot in terms of sectors at 56.4%, closely followed by multi utilities (39.6%).

The product charges 15 bps in annual fees and sees heavy volume of around 14.6 million shares. It has lost about 6.3% in the year-to-date timeframe and has a decent Zacks ETF Rank of 3 with a Medium risk outlook.

Consumer Staples Select Sector SPDR Fund ( XLP )

The most popular consumer staples ETF, XLP follows the S&P Consumer Staples Select Sector Index, and has amassed about $9.7 billion in its asset base. The fund charges 15 bps in fees per year from investors and trades in heavy volume of more than 8.2 million shares a day. In total, this large cap centric fund holds about 41 securities in its basket with double-digit allocation to Procter & Gamble ( PG ). Other firms do not hold more than 8.84% of assets (read: Consumer Staples ETF Investing 101 ).

From a sector look, food and staples retailing takes the top spot at 27.5%, while beverages, household products, food products and tobacco account for double-digit allocation each. XLP is up 0.8% in the year-to-date timeframe and has a Zacks ETF Rank of 3 with a Medium Low risk outlook.

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ISHARS-MTG RE (REM): ETF Research Reports

SPDR-UTIL SELS (XLU): ETF Research Reports

SPDR-CONS STPL (XLP): ETF Research Reports

AMER CAP AGENCY (AGNC): Free Stock Analysis Report

ANNALY CAP MGMT (NLY): Free Stock Analysis Report

PROCTER & GAMBL (PG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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