Financials ETFs Are Embracing a December Fed Rate Hike

Financials ETFs were among those that welcomed the upbeat jobs report, as this sector is poised to see profits rise as rates increase. Comments from Bill Gross contending that he sees a “100% chance” of the Fed raising rates at their next meeting in December further solidified expectations surrounding this development.

Read more about why Consumer Discretionary ETFs are also in focus after the recent wage gains data.

Consider the following sector ETF returns spanning from November 5 through the end of the following day (Friday), aimed to capture the reaction to last month’s jobs report. Please note this peer group isn’t broad-based, but instead is meant to emphasize the vast difference in expectations surrounding the impact of the impending rate hike on each of the sectors highlighted:

Key takeaways:

• The jobs report clearly was taken as a signal that rates will rise soon, judging by the gross underperformance of rate-sensitive securities such as Utilities (XLU A) and REITs (VNQ A+).
• Financials (XLF A), on the other hand, outperformed the broad-market (SPY A) by a healthy margin.
• Within the financial sector, the biggest winners were Banks (KBE A), especially Regional (KRE A-) ones, followed by Broker-Dealers (IAI B+).

The ultimate takeaway here is that financials ETFs are ready for, and very much welcoming, the impending rate hike. Whether this sectors’ magnitude of outperformance before the actual rate hike has taken place is warranted is a separate question, and only time will tell how eager the bulls are to take profits.

Read about Five Not-So-Obvious Ways to Deal With the Risk of Rising Rates

Putting each sector’s reaction to the jobs report in context of the longer-term trend at hand is vital; as such, consider the same list of ETFs as above – except this time, the returns are YTD (as of 11/10/2015).

Key takeaways:

• It seems like REITs and Utilities have been “pricing in” a rate hike all year, judging by their relative underperformance in 2015.
• Likewise, Banks have been “pricing in” a rate hike as well, judging by their relative, and quite stellar, outperformance.
• The only sub-sector that reacted more positively than the broad market (and the broad financials sector) on November 6 and still remains below the broad market when looking at returns YTD is the Broker-Dealer, represented by (IAI B+).

Investors also may want to focus on a slice of the financial sector not covered above, in which case, the Full List of Financials ETFs might come in handy.

Financials ETFs have come into the spotlight once again as the rate hike becomes more and more certain. Investors looking to play this trend should be mindful that many of the financials sub-sectors already have been leading the market in anticipation of higher rates; in this case, it may be prudent to wait for a more meaningful pullback before jumping in. Lastly, the Broker-Dealer sub-sector appears to have the most “room to run” when we consider sub-sectors that are embracing the rate hike, as evidenced by a positive reaction to the latest jobs report, but are still underperforming from a YTD perspective.

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