2 ETFs on track to take advantage of the Fed’s new interest rate hike cycle


Interest rates in the United States are rising. The country’s scorching level prompted the Federal Reserve to step in to reach its dual mandate of “price stability and maximum sustainable employment”.

Price stability means that the Fed would like to see annual inflation at a stable rate of 2%. However, at present, the 12-month Consumer Price Index (CPI) inflation rate is at its highest level since the 1990s.

Consequently, on March 16, the US central bank raised interest rates by a quarter of a percent for the first time since 2018. The Federal Open Market Committee (FOMC) statement that accompanied the hike noted:

Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures.

Fed officials also expressed concern about the potential economic and inflationary implications of Russia’s invasion of Ukraine. So, we’re likely to see six more rate hikes in 2022. In other words, Wall Street expects ambitious and targeted action from the nation’s monetary policymakers to rein in inflation for the rest of the year.

As a result, borrowing costs for businesses and individuals will increase significantly. Therefore, investors are looking for asset classes and sectors that could perform well in the new environment of higher interest rates.

Todays article introduces two exchange-traded funds (ETFs) that might appeal to a range of readers. Both funds are offered by black rock (NYSE:), the world’s largest ETF provider.

1. iShares US Regional Banks ETF

  • Current price: $61.76
  • 52 week range: $53.41 – $69.71
  • Dividend yield: 1.88%
  • Spending rate: 0.41% per year

During periods of rising interest rates, Wall Street focuses on the financial sector. Banks naturally charge higher rates for the revolving lines of credit and mortgages they offer.

Meanwhile, deposit rates for savers generally don’t move as much. As a result, their net interest margins increase.

Additionally, partly due to the level of fiscal stimulus during the pandemic, banks have not reported a significant increase in non-performing loans (NPLs). Therefore, bad debt losses should not weigh on earnings in the coming months.

Our first fund, the iShares U.S. Regional Banks ETF (NYSE:), invests in US regional banks that could benefit from higher interest rates. The fund was first listed in May 2006.

IAT, which tracks the index, has 39 stocks. When it comes to subsectors, we see Regional Banks (87.07%), Diversified Banks (11.69%), and Savings and Mortgage Finance (0.94%), among others.

Meanwhile, the portfolio’s top 10 stocks account for almost 63% of the $1.45 billion in net assets. These main holdings include PNC Financial Services (NYSE:), Financial truist (NYSE:), American bank (NYSE:), SVB Financial Group (NASDAQ:), and Fifth Third Bancorp (NASDAQ:).

The IAT has increased by 4.9% over the past year and hit a record high in early January. Since then, however, ETF shares have come under pressure and the fund has lost around 11% of its value.

Rear P/E and P/B ratios are 12.99x and 1.53x respectively. Buy-and-hold investors might consider buying IAT around current levels.

2. iShares Edge MSCI International Value Factor ETF

  • Current price: $25.34
  • 52 week range: $23.26 – $27.36
  • Dividend yield: 3.27%
  • Spending rate: 0.30% per year

US-based investors, concerned about the potential effects of rising interest rates, could also look to global equities.

the iShares MSCI International Value Factor ETF (NYSE:) provides access to international large and mid-cap (cap) companies from developed countries that exhibit value characteristics. In times of uncertainty, market participants typically favor value stocks for their earnings, stable cash flow, dividends, and growth potential.

Weekly IVLU

IVLU, which has 346 holdings, tracks the MSCI World ex USA Enhanced Value index. Since its inception in June 2015, assets under management have reached $1.35 billion.

Financial shares have the highest brackets with 18.57%. Next come Industrials (15.90%), Healthcare (11.65%), Consumer Discretionary (10.20%), Consumer Staples (9.90%), Computers (9.12 %) and materials (8.78%). About one-fifth of the portfolio is made up of the top 10 stocks.

In terms of geographical distribution, more than a third of the names in the IVLU come from Japan. We then have companies from the United Kingdom (17.13%), France (10.91%), Germany (8.37%), Switzerland (5.48%) and Italy (3. 63%) among others.

Among these are British American Tobacco (LON:) (NYSE:); Toyota engine (NYSE:); pharmaceutical heavyweights Novartis (NYSE:) and Sanofi (PA:) (NASDAQ:); and oil major Shell (NYSE:).

The IVLU has lost 1.48% over the past year and 0.40% since the start of the year. Rear P/E and P/B ratios are 10.10x and 1.02x respectively. Readers interested in global stocks that trade at a significant discount to their intrinsic value should do more due diligence on the IVLU.


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