ETF Strategies to Consider for February as Fed's Rate Hike Nears

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Wall Street has been mostly kind to investors so far in February after a tough January. Market participants are upbeat about improving U.S. economic conditions as reflected by encouraging fourth-quarter earnings results and a very upbeat jobs report for January. The improving labor market conditions were observed despite the rising cases of the Omicron variant of coronavirus.

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Considering the different investment environment conditions that investors might come across in February, we are highlighting a few ETF options:

Combat Rate Hike Worries With These ETFs

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Post the Federal Reserve Open Market Committee’s meeting, Chairman Jerome Powell indicated that the first rate hike since 2018 could be seen as early as March 2022. The Federal Reserve has already started tapering bond purchases, which it expects to complete by March. However, the magnitude and the month of the interest rate hike have not been clearly stated. Against this backdrop, let’s take a look at some of the safe ETF options that investors can consider:

Invesco KBW Bank ETF KBWB

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The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.

Invesco KBW Bank ETF is based on the KBW Nasdaq Bank Index. The index is a modified-market capitalization-weighted index of companies primarily engaged in U.S. banking activities. It has AUM of $3.53 billion and charges 0.35% in expense ratio (read: Warren Buffett Wins in 2022: ETF Lessons to Learn From).

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The Energy Select Sector SPDR Fund XLE

Investors are closely tracking the energy sector, which is showing strength as global demand and economic growth levels are on the path of recovery from the pandemic lows. Oil prices have been rising since the beginning of 2022. The upside in crude oil prices is triggered by various factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East. In fact, the prices for U.S. oil surged past $90 on Feb 3 for the first time since 2014 (per a CNBC article). Despite rising demand for petroleum products, the upside is being observed as limited supply remains a challenge.

The fund seeks to provide investment results, before expenses, that generally correspond to the price and yield performance of the Energy Select Sector Index. With AUM of $34.45 billion, the fund has an expense ratio of 0.10% (read: ETF Asset Report for January: Stocks, Energy & Gold Win).

ETFs to Deal With Market Gyrations

Wall Street remained in a tug of war recently as trading sessions witnessed wild intraday movements. Thus, seeing the market gyrations and the investment environment, here are some ETF investment choices for investors:

Invesco S&P 500 Low Volatility ETF SPLV

Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products usually do not surge in bull market conditions but offer more protection than the unpredictable ones. These funds are less cyclical, providing more stable cash flow than the overall market.

Invesco S&P 500 Low Volatility ETF has been providing exposure to stocks with the lowest realized volatility over the past 12 months. The fund is based on the S&P 500 Low Volatility Index and holds 102 securities in its basket. Invesco S&P 500 Low Volatility ETF hasAUM of $9.51 billion and charges an expense ratio of 25 basis points (bps), as stated in the prospectus.

iShares MSCI USA Quality Factor ETF QUAL

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. These stocks also have a track record of stable or increasing sales and earnings growth. Compared to plain vanilla funds, these products help lower volatility and perform better during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.

iShares MSCI USA Quality Factor ETF provides exposure to the large- and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. With AUM of $22.76 billion, QUAL charges 0.15% of fees (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).

Ride the Earnings Optimism With These ETFs

The impressive fourth-quarter earnings results have been keeping investors busy. Notably, 79% of the S&P 500 companies that have reported earnings results have surpassed analysts’ earnings estimates and 77% have beat revenue projections as of Feb 6, per a CNBC article. The earnings results are helping ease investor worries surrounding the rising supply-chain disturbances, gradually eroding the corporate profit margins.

iShares MSCI USA Momentum Factor ETF MTUM

Momentum investing looks to fetch profits from hot stocks that have shown an uptrend over the past few weeks or months. Here we present five ETFs that could outperform on the current market optimism. Further, these could beat broader market returns in the coming months if the optimism prevails.

iShares MSCI USA Momentum Factor ETF provides exposure to large and mid-cap stocks that exhibit relatively higher price momentum by tracking the MSCI USA Momentum SR Variant Index. iShares MSCI USA Momentum Factor ETF charges 15 bps in fees per year and is a popular choice, with AUM of $12.55 billion (read: ETFs to Join Wall Street’s Latest Rebound Rally).

Vanguard Small-Cap Growth ETF VBK

The small-cap centric index, the Russell 2000, witnessed its first positive week in five (for the week ending Feb 4). The index also delivered its best week of 2022. This upside is being largely aided by the small-cap companies closely tied to the U.S. economy and are, therefore, well-positioned to outshine when the economy improves.

This fund follows the CRSP US Small Cap Growth Index. The product manages assets worth $13.93 billion and charges 7 bps in annual fees and expenses.


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Energy Select Sector SPDR ETF (XLE): ETF Research Reports

 

iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

 

Invesco KBW Bank ETF (KBWB): ETF Research Reports

 

iShares MSCI USA Momentum Factor ETF (MTUM): ETF Research Reports

 

Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports

 

Vanguard SmallCap Growth ETF (VBK): ETF Research Reports

 

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