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 and 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 Wednesday, indicating a broad swath of industries and sectors are, at least initially, tolerant of the Fed's rate hike and plans for next year.

Initially Tolerant

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 U.S. 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.

Looking Forward: Industry ETFs

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

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 percent. 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 burgeoning housing market, added Mazza.

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

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