January 20, 2022

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3 ETFs To Avoid Following The Fed’s Latest Interest Rate Cut

In an emergency move, one that some argued was a sign of panic, the Federal Reserve on Tuesday slashed interest rates by 50 basis points. The central bank meets later this month and there is plenty of chatter another rate cut could be revealed then as an avenue for propping up markets and the economy if the coronavirus situation doesn’t improve.

Interest rate cuts are often viewed in a positive light, though the initial reaction to this one was downbeat as investors ponder the fate of a Fed running low on ammunition going forward.

Of course, interest rate reductions also have a way of crimping some sectors, so even if the market rebounds, investors may want to steer clear of the following exchange traded funds.

iShares U.S. Insurance ETF (IAK)

One day doesn’t mean in the broader scheme of things, but the iShares U.S. Insurance ETF (NYSE: IAK) is trailing the broader market Wednesday by a wide margin as stocks rebound. The reason for that scenario is straight forward: life and property and casualty insurers, such as the ones residing in IAK, are rate-sensitive in both directions, meaning higher rates usually benefit the industry.

Insurers typically hold large amounts of cash, so as rates decline, the amount of interest generated by that cash does as well. Bottom line: insurance companies’ performance is often linear with interest rates, meaning IAK and rival ETFs are probably a pass for some time.

See Also: Desperate Measures? Here’s What Experts Think About The Fed’s Interest Rate Cut

SPDR S&P Regional Banking ETF (KRE)

Like the aforementioned IAK, the SPDR S&P Regional Banking ETF (NYSE: KRE) is rebounding today, but it’s well behind the broader market. Broadly speaking, regional banks are vulnerable to interest rate reductions because lower rates pinch net interest margins.

From bank to bank, how sensitive each name is to lower interest rates is largely dependent on the composition of commercial loan portfolios, so with some due diligence, investors may be able to find some undervalued winners in the regional banking space today.

The issue is regional banks are universally viewed as ideas to eschew when rates are cut, a sentiment that will likely pressure products such as KRE over the near term.

Invesco S&P SmallCap Financials ETF (PSCF)

Small-cap stocks can offer some benefits when interest rates rise because that scenario can be seen as a vote of confidence in the economy. Conversely, lower rates are also beneficial to smaller firms because of the possibility of lower financing costs.

However, the Invesco S&P SmallCap Financials ETF (NASDAQ: PSCF) won’t be benefiting from either scenario anytime soon because rate hikes are clearly off the table.

In fact, small-cap banks are even more vulnerable to lower rates because they lack the scale and diversified business models of their large-cap peers.

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