3 Ways to Play the Fed's Rate Hike

 | Mar 22, 2018 | 12:17 PM EDT
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Stock quotes in this article:

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Wall Street's major indices are under heavy selling pressure at midday Thursday following the Federal Reserve's decision Wednesday to raise rates, but bonds are trading higher and there are three post-Fed plays that I like.

Now, I should first point out that the market usually experiences various ramifications whenever the Fed makes an interest-rate pronouncement. Rate-sensitive stocks obviously move, but what's often more important is how the decision impacts the yield curve. The U.S. dollar also often reacts, which in turn can impact commodities and precious metals.

The easiest way to see how Wednesday's rate hike is impacting bonds is to look at the iShares 7-10 year Treasury ETF (IEF) and the iShares 20+ Year Treasury ETF (TLT) . Both are rising, but not because of sudden fears that the Fed is becoming more hawkish. There are other issues at work here, and the market feels the Fed isn't in a rush to raise rates.

Buy MLPs

How do we take advantage of that? Well, the first stocks to look at are rate-sensitive names like master limited partnerships (or "MLPs").

Several stocks in this group have gotten punished due to a recent arcane tax change that affects them. However, they should come back if rates don't climb too fast. A few names that I'm watching in this space include Boardwalk Pipeline Partners (BWP) , Energy Transfer Partners (ETP) , Genesis Energy (GEL) , Hess Midstream (HESM) and Kinder Morgan (KMI) .

Go Long on Gold ETFs

A second way to play the Fed is with precious metals. Probably the best vehicles for that are the SPDR Gold Trust ETF (GLD) and the VanEck Gold Miners ETF (GDX) . These two don't always move in tandem, so there's often some advantage in one or the other.

Now, investors have long seen gold as a hedge against inflation. But recently, it's tended to move more off of currencies. So, gold is down on a weaker U.S. dollar as I write this. Still, gold ETFs will likely see inflows over the longer term if the Fed continues to raise rates.

Watch bonds. When they start to weaken again, that will likely be the signal to build a position in gold regardless of what the dollar might be doing.

Buy Bank Stocks

A third way to play the Fed's hikes is with the SPDR Select Sector Financial ETF (XLF) , which provides broad exposure to banks.

XLF is down sharply Thursday, as banks tend to mostly benefit from higher rates when the yield curve is steeply curved (it's pretty flat now). A steep curve allows financial firms to borrow cheap funds short-term and lend the money out at much higher rates over the longer term.

However, the exact opposite is occurring Thursday, with bonds actually trading higher and interest-rate spreads narrowing. That means banks are seeing a less-favorable yield environment right now. So, watch for a shift in the yield curve before you venture into banks.

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