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3 Ways To Trade The Fed Rate Decision

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3 Ways To Trade The Fed Rate Decision

The Federal Reserve begins its December meeting on Tuesday, and the market widely expects the first U.S. interest rate hike since December of last year. A recent Wall Street Journal poll revealed economists expect four 0.25 percent rate hikes by the Fed between now and the end of 2017.

Given the likelihood of steadily-rising interest rates, investors are now shifting their attention which investments are best-positioned for the imminent tightening. Here are three ETFs to consider.

SPDR S&P Metals and Mining (ETF) (NYSE: XME)

Historically, commodity prices have outperformed in the first six months of a rate-tightening cycle. Most commodities have performed relatively well in 2016 already. Higher commodity prices would be a shot in the arm for miners and the XME ETF.

Financial Select Sector SPDR Fund (NYSE: XLF)

Now that the XLF no longer holds REITs, it's a much better option for a rising rates cycle. Banks and insurance companies benefit from higher interest rates because they allow for higher margins. However, there is an inverse correlation between interest rates and REIT performance, so any financial ETF that holds REITs will likely not perform as well.

Sit Rising Rate ETF (NYSE: RISE)

For investors that really expect interest rates to take off, the RISE ETF is specifically designed to move on rising rates. The RISE shorts futures contracts on two- five- and 10-year Treasury bonds. The ETF is structured to produce a 10X levered return on interest rates. If economists are correct and rates rise by 1.0 percent in the next year, the RISE ETF would theoretically generate a +10 percent return, minus fees and tracking errors.

 

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