ETF Strategy for Rate Hikes

Yesterday the Federal Reseve made a suprise move in raising the discount rate 25bps to .75%. This should not been seen as a signal for tighter monetary conditions to come in the short term, and today’s CPI report should further strengthen that notion (Core CPI was down .1%). However, most market forecasts see a likely rate move towards the end of this year.

Credit Suisse is out with a research reports on equity strategy for playing the intial Fed rate hike. Interestingly, CS reports that markets typically correct by 9% for 3 months around the first phase of monetary tightening. The typical correction is 15% of the previous rally.

Source: Credit Suisse


Credit Suisse analysts also note that retail, technology, and media tend to outperform after the first Fed rate hike, while energy and industrial goods tend to outperform in the period before the first rate hike.

Source: Credit Suisse

If you are believe this past trends will persist this time around going long these Energy and Industrial ETFs now could be a good play:

XLE  SPDR-Energy

XLI  SPDR-Industrial

And then rotating into these ETFs after the first rate hike expected later this year:


IYW  iShares DJ US Technology

PBS  PowerShares Dynamic Media Portfolio

Credit Suisse also provides a handy table to identify sectors that provide hedges against rising rates.  They chose sectors with high correlations with the 2yr Treasury bond, high Free Cash Flow yield and low net debt.


Source: Credit Suisse

If you beleive CS’s line of reasoning here these ETFs will be good hedges against rising rates:

IGV  iShares Goldman Sachs Software Index

IGN  iShares Goldman Sachs Networking Index

PEJ  PowerShares Dynamic Leisure and Entertainment Portfolio


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