Interest Rate Hike Looms: What History Says About the Best ETF to Buy

The Federal Reserve's upcoming meeting on September 16 is expected to be a pivotal moment for the US economy, with many investors anticipating a rate hike. As the central bank considers its next move, history suggests that a defensive play in the healthcare sector could be the smartest ETF to buy right now.

Why a Rate Hike is Imminent

The Fed's hand may be forced due to climbing Core Personal Consumption Expenditures (PCE), a preferred tool of the Federal Open Market Committee (FOMC) that strips out volatile energy and food prices. This gauge implies that consumers are paying higher prices for an array of goods beyond gas and groceries, making a rate hike a likely outcome.

Rate-Hike Protection in Healthcare Stocks

Investors may find some rate-hike protection in healthcare stocks and exchange-traded funds, such as the State Street Health Care Select Sector SPDR ETF (NYSEMKT: XLV). This $45 billion healthcare ETF has a favorable recent history, having lost just 1.1% when the S&P 500 tumbled 18.6% during the 2022 rate-tightening regime.

Why Healthcare ETFs Are a Smart Play

The correlation between equities and 10-year Treasury yields is now negative, indicating that investors are walking on sticky inflation eggshells. Defensive sectors, including healthcare, have a history of proving durable or less bad when this "correlation conundrum" appears. One reason is that those groups are chock-full of dividend-paying stocks, which can serve as a buffer when broader benchmarks slip.

Dividend-Paying Stocks in the Healthcare ETF

The SPDR ETF carries a 30-day SEC yield of 1.47% and is home to four Dividend Kings – companies that have raised payouts in 50 consecutive years. Three of these Dividend Kings are among the fund's top 10 holdings, led by Johnson & Johnson, which is the healthcare ETF's second-largest component.

What to Watch Next

If the Fed does hike interest rates this month, history suggests that the State Street Health Care Select Sector SPDR ETF could be a smart play. The healthcare sector's reputation for growing earnings in inflationary environments makes it an attractive option for investors looking for rate-hike protection. While the ETF is not a cure for undesirable monetary policy, it can provide a buffer against market volatility.

Expert Insights

Some experts call the healthcare sector the "antidote" for inflationary times, and for good reason. The sector's reputation for growing earnings in inflationary environments makes it an attractive option for investors looking for rate-hike protection. While the ETF is not a cure for undesirable monetary policy, it can provide a buffer against market volatility.

Conclusion

In conclusion, if the Fed hikes interest rates this month, history suggests that the State Street Health Care Select Sector SPDR ETF could be a smart play. The healthcare sector's reputation for growing earnings in inflationary environments makes it an attractive option for investors looking for rate-hike protection. While the ETF is not a cure for undesirable monetary policy, it can provide a buffer against market volatility.