4 ETFs You Can Use to Play the Fed

Apparently there are now three things that are guaranteed in life: death, taxes and higher interest rates.

federal reserve

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The FOMC will emerge from its two-day cocoon to potentially tip its hand on where interest rates might go over the next few months, but we’ll go out on the limb and just tell you that no matter what we hear today, they’ll be higher by the end of the year.

According to Fed funds futures, the pits are still betting on the timing of a rate increase to happen in the September-October period. While the magical word “patience” may drop from the language this afternoon, we still believe the market is looking at a slight increase in the second half as Janet Yellen has made it clear that she will remain patient, regardless of the upcoming statement.

You’ve still got time to adjust your portfolio to benefit from strength in areas of the market that should rally on the Fed’s actions.

For our money, these are four ETFs we consider to be “Fed-friendly” investments for almost any portfolio.

ETFs to Play the Fed: SPDR KBW Bank (ETF) (KBE)

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Historically, higher rates lend strength to banking stocks. As a result, people may rush to the financials as a play on higher rates, but we like to focus a little tighter on the banking sector by using the SPDR KBW Bank (ETF) (NYSEARCA:KBE).

This ETF represents banking stocks, not financials, which means you get away from the large financials with their investment bank, investment management and other peripheral activities.

We like this difference as it should result in a more direct correlation with interest rates.

ETFs to Play the Fed: iShares Russell 2000 Index ETF (IWM)

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Most people don’t think of small-cap stocks — viewed via the iShares Russell 2000 Index ETF (NYSEARCA:IWM) — as an answer to a rising-interest-rate environment, but stick with the logic for a minute.

Small-cap companies typically use less debt from the market, which means an increase in interest rates won’t affect their balance sheets as much as the mid- and large-cap companies that have heavier debt loads to worry about. In addition, small-cap stocks are typically more responsive to improvements in the economy.

With that in mind, let’s not forget why the FOMC will be raising rates. (Hint: It’s an improving economy.)

ETFs to Play the Fed: iShares MSCI Germany Index Fund (ETF) (EWG)

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It might seem odd, but look overseas for a Fed hedge.

That’s right: The German economy is gaining some steam again as it represents one of the best economies in the eurozone. The economic strength will be aided by the accommodative monetary policy of the ECB will provide further tailwinds for Germany.

The iShares MSCI Germany Index Fund (ETF) (NYSEARCA:EWG) is up 8% year-to-date and we’re expecting another 10% to 20% gain through the year.

ETFs to Play the Fed: iShares Currency Hedged MSCI Germany ETF (HEWG)

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Higher interest rates here will continue to drive the U.S. dollar higher against the euro. Some estimates are for the euro to trade another 25% lower against the dollar.

Taking the Germany trade to the next level, the hedged version of the EWG — the iShares Currency Hedged MSCI Germany ETF (NYSEARCA:HEWG) offers another layer of benefits for investors, a dollar hedge.

Think you don’t need to hedge the dollar’s strength? Year-to-date returns for the HEWG are 22%, compared to 8% for the unhedged Germany ETF. These ETFs include a currency hedge that will reduce the dollar’s strength against the euro.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/4-etfs-fed-fomc-kbe-iwm-ewg-hewg/.

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