The Federal Open Market Committee voted to raise rates on March 15, 2017, and it was what the markets expected prior to the meeting. That said, traders placed over a 90% probability that the Fed would raise rates, and they were right on the money. In the same week, the Bank of Japan kept its monetary policy steady, which could push investors to flock to some other investments. The Bank of Japan maintained its short-term interest rate target at -0.1%. Let’s get back to the Fed…
The markets reacted as if the Fed cut interest rates, but it did the exact opposite and raised rates by 25 BPs. That in mind, the Fed’s outlook was less hawkish than some market participants expected, and the SPDR S&P 500 ETF (NYSEARCA: SPY) was more or less unchanged during the week. That in mind, there are some specific ETFs that the Fed’s rate hike and potential future rate hikes could affect.
VanEck Vectors Gold Miners ETF
The VanEck Vectors Gold Miners ETF(NYSEARCA: GDX) is an exchange-traded fund that aims to replicate the price and yield performance of the NYSE Arca Gold Miners Index. The fund’s benchmark index aims to track the overall performance of companies within the gold mining industry.
Trader Jason Bond stated, “Gold traditionally has a strong inverse correlation to interest rates and inflation. Although the Fed moved to raise rates, it was a dovish rate hike since the markets were expecting more than two additional rate hikes this year. Consequently, we actually saw a rise in GDX this week of the FOMC meeting.”
Now, GDX is dependent on the price of gold, and interest rates, as well as supply and demand. Moreover, political risks could affect the yellow precious metal. With the next FOMC voting meetingcoming up in May, market participants might want to keep an eye on this fund.
IShares 20+ Year Treasury Bond ETF
The iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) is another exchange-traded fund that isdesigned to provide investors with targeted access to the long-term U.S. Treasury market. TLT aims to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index, which is an index composed of U.S. Treasury bonds with remaining maturities of more than 20 years.
You may already know that bond prices and interest rates have an inverse correlation. If interest rates rise, bond prices tend to fall. The opposite is also true. According to one trader and mentor, “We actually saw a slight rise in TLT during the week of the FOMC meeting. TLT was up over 1% that week, and this could be attributed to the ‘dovish’ rate hike. However, if the Fed raises rates multiple times this year, TLT might fall over the short term. Thereafter, investors in TLT may receive more income since fund managers would be able to reinvest at a higher interest rate.”
Contrary to what many believe, TLT could actually rise in a rising interest rate environment due to potentially higher yields and higher income. In a BlackRock blog post, Matt Tucker also indicated that rising interest rates could be good for long-term investors. When funds reinvest cash flows at higher yields in a rising interest rate environment, it would steadily boost income. Over the long term, this could potentially increase income and the over performance of a fund like TLT.
The Bottom Line
The Fed raised interest rates and it should affect some specific sectors and asset classes. GDX and TLT are only two ETFs that should be affected by the interest rate hike, but the dovish hike could push these ETFs higher.