4 ETF Winners and Losers After Fed’s Interest Rate Hike

The 25 basis point decision, plus Powell’s comments, impact some funds more than others.

Reviewed by: Lisa Barr
Edited by: Sean Allocca

The Federal Reserve’s 25 basis point hike on Wednesday brings interest rates to a 16-year high, which could help investors prioritizing exchange-traded funds that invest in companies with less debt and lower exposure to commodities. 

As the economy continues to slow, the Fed’s latest action draws heavier lines between likely ETF winners and losers in the period ahead. 

Inflation remains elevated, and there is no strong signal of a reversal. While the recent dip to 5% is a lot better for consumers than the 9% peak reported last June, that’s far above normal. Indeed, the consumer price index is still higher than at any point since 2008—a year that left many investors with steep losses.  

The optimistic view is that with the Fed close to the end of its credit-tightening cycle, a new era of strong stock market performance can be ushered in. But the bears can easily counter by pointing to notorious lagging effects that the past year’s sharp increase in rates will have on consumer behavior and the job market. Or, as the Fed said itself in its statement, “tighter credit conditions are likely to weigh on the economy.” 

The ETF Outlook 

Some ETFs are likely to be impacted more than most. Potential losers include ETFs whose stock holdings have high levels of debt, as well as commodity-driven ETFs.  

This is arguably one of the worst times in a decade and a half to be reliant on continued borrowing to grow a business. Compound that with, as Chairman Jerome Powell said in his statement, “The labor market remains very tight,” and you get a formula for tough sledding for leveraged companies and the ETFs that hold them.  

Many stocks in the energy pipeline industry are heavily reliant on debt and could spell trouble ahead for ETFs like the Alerian MLP ETF (AMLP).  

When the global economy slows, that reduces the demand for commodities, including gas, materials used in construction, and those used to produce food. That implies continued risk for commodity ETFs like the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC), which is already down about 27% in the past 12 months. 

ETFs that represent the opposite of low debt and commodity-heavy exposure could actually benefit from the Fed’s latest announcement; for example, the Invesco S&P 500 Quality ETF (SPHQ), which screens the S&P 500 for the 100 stocks that best meet a strict set of requirements it calls a "quality score." Not surprisingly, more than 50% of this ETF’s current portfolio is invested in technology, healthcare and consumer staples stocks. 

Finally, the larger biotech stocks tend to maintain lower debt ratios, so those like the iShares Biotechnology ETF (IBB), which owns more than 270 stocks, but only 10 account for more than 50% of assets, could be well-positioned. 

Fed day is generally a market-moving event, and this one was no different. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.