An Interesting ETF for a Rising Rate Environment
Good day readers,
Well it now looks as though the Federal Reserve will likely start getting a bit more aggressive in raising interest rates in the medium term, perhaps the next few quarters… barring any further economic setbacks. While this may bode poorly for your general portfolio during this term, there are sectors that actually enjoy rising rates. Today we’ll have a look at one such sector… Financials, and an interesting ETF in a rising rate environment.
Typically, rising interest rates hurt the broad market. With money costing more to borrow, larger investors, institutions and public companies will typically use capital gains or cash, rather than loans to pursue their interests. Over the course of the record low rate environment, corporations, for example, have used debt to purchase their own stock, driving share prices higher. (CEO’s love this strategy, as it allows their stock options to vest… a bit shady, yes). With debt about to cost more, the likelihood of this practice continuing on such a large scale is diminished, so artificial share price increases are slowly, very slowly, coming to an end.
This doesn’t mean the market will crash, it could simply mean that the broad market may soon correct, or slip into a long term flat trend. Of course, solid economic news, like real “full time” job growth, a real increase in wages and purchasing power of the consumer and GDP growth over 4% would allow the market to look beyond the rising rate environment and concentrate on corporate growth. Unfortunately, these scenarios look to be further out than we’d like.
So, there’s no need to panic, no need to dump your entire portfolio, and no need to run for the hills. Hold tight, and consider adding some positions that thrive in the environment.
With large banks holding a boatload of cash, a rate hike correlates to increased yield on that cash… making them more profitable. When these banks loan out cash at these higher rates, they conversely make more money on the loan. This is one reason that “the little guy” has had a tough time getting loans. Banks see the low rates and say “let’s wait to do release the loans until we can actually make money on them… why take the risk of default if we’re hardly making anything on the loan anyhow?.”
In the upcoming environment, money they will make! As long as demand for that money is still there… which we are hoping to be supplied by real GDP growth.
Anyhow, have a look at PowerShares Financial Preferred ETF (PGF). This ETF, according to Yahoo! Finance, “ seeks investment results that generally correspond (before fees and expenses) to the price and yield of the Wells Fargo® Hybrid & Preferred Securities Financial Index. The fund generally will invest at least 90% of its total assets in preferred securities of financial institutions that comprise the underlying index. The underlying index is a market capitalization weighted index designed to track the performance of preferred securities traded in the U.S. market by financial institutions. The fund is non-diversified.”
The ETF is yielding 5.5%, trading around $18.90 per share.
Also, have a peek at JP Morgan Chase (JPM) and Wells Fargo (WF). These two giant banks may see some nice gains in the coming quarters.
Have a great day!