As Rates Set to Increase, U.S. Stocks Well Positioned

If inflation does not come down later this year as expected,  Powell said the central bank is prepared to move more aggressively –  balancing inflation that has surged to the highest levels in decades with the unknown risks and effects of Russia’s invasion of Ukraine.

Contrary to popular belief, U.S. stocks generally have fared better during Fed tightening cycles than during Fed easing cycles. That’s because Fed tightening occurred in the second half of U.S. business cycles 67% of the time, and Fed easing overlapped with U.S. economic recessions 67% of the time, according to Talley Léger, senior investment strategist at Invesco

Léger expects that after their recent correction, U.S. large-cap growth stocks will resurface, given tighter fiscal and monetary policy coupled with slower activity.

A strong offering to consider in the current economic climate is the Invesco S&P 500 Equal Weight ETF (RSP A-). 

Opting for an equal-weight index, as opposed to a market cap-weighted approach, can provide diversification benefits and reduce concentration risk by weighting each constituent company equally, so that a small group of companies does not have an outsized impact on the index.

As the largest equal-weight ETF, RSP can ease some of the rate hike risk associated with cap-weighted equity funds. RSP isn’t as heavily allocated to tech stocks, which can be especially vulnerable to rising rates.

With quarterly rebalances to maintain equal weightings, RSP’s methodology imposes a strict “buy low/sell high” discipline, trimming allocations to companies that have grown and increasing allocations to companies that have underperformed, according to Invesco.

Another equal-weighted ETF to consider is the Invesco ESG S&P 500 Equal Weight ETF (RSPE B), which integrates ESG considerations into the investment strategy.

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