An Industry ETF For A Post-Rate Hike World

The Federal Reserve finally did it. On Wednesday, the U.S. central bank raised interest rates for the first time in more than nine years, setting the course for several more rate hikes in 2016, perhaps taking rates as high as 1.25 percent by the end of the year.

After the dust settled on the Fed's rate hike of the expected 25 basis points, U.S. stocks surged with the S&P 500 climbing nearly 1.5 percent. Only two of the 30 members of the Dow Jones Industrial Average closed lower yesterday, indicating a broad swath of industries and sectors are, at least initially, tolerant of the Fed's rate hike and plans for next year.

“Anticipating that the Federal Reserve would hike rates this year, we have seen investors transitioning their equity holdings into sectors and industries that are geared for a continued US economic recovery,” said State Street Global Advisors Vice President David Mazza in a note out Wednesday. “Historically, while a rising economic tide tends to lift all sectors to some degree, we believe the consumer discretionary and financial sectors will likely benefit most in this stage of the recovery.” 

Despite presumed ebullience surrounding regional banks in a rising rate environment, homebuilders equities and ETFs such as the SPDR S&P Homebuilders ETF XHB could surprises investors and merit a place in portfolios in this post-rate hike world. 

XHB equal-weight XHB has climbed nearly 3.5 percent year-to-date, which suggests the ETF has enjoyed the consumer discretionary group's showing as the best-performing sector this year.

“The US labor market continues to strengthen as the unemployment rate has dropped to 5.0%. The strong employment backdrop has buoyed homebuilder sentiment and housing demand. Incorporating discretionary housing industries, such as home improvement and furnishing retail, and expanding beyond concentrated positions in new home construction firms is the preferred approach to capturing the full effects of this bourgeoning housing market,” adds Mazza.

The $1.79 billion XHB is home to 34 stocks, none of which command weights in excess of 3.97 percent. Dow component Home Depot Inc. HD is XHB's largest holding. Other top 10 holdings include Home Depot's chief rival, Lowes Cos. LOW, along with NVR Inc. NVR and Owens Corning OC.

XHB's discretionary exposure is substantial as the ETF allocates over 28 percent of its combined weight to home furnishings retailers, home improvement chains and home furnishings manufacturers.