Watch The Inflation Numbers

During the first few trading days of March 2023, we watched the stock market falter, housing demand cool, the 10 Year Treasury Bond rises to a 4% yield, and the 30-year fixed mortgage increase above 7%.

This all came after several hotter-than-expected inflation reports hit investor confidence.

The Federal Reserve has also cut back on its interest rate hikes, going from an increase of 75 basis points to 50 basis points, down to just a 25 basis point increase. Those reduced rate hike increases were due to inflation reports trending in the right direction.

However, reports coming out now show inflation has not yet been tamed after the hikes were slowed. And this is having both big and small investors and some Federal Reserve members calling for faster rate hikes in the future.

David Einhorn, who had a 36% return in his hedge fund in 2022, recently said investors should still be bearish on stocks and bullish on inflation in 2023. Einhorn was short US equities in 2022 and performed very well for his hedge fund investors.

Former Pimco Chief Executive Officer Mohamed A. El-Erian recently wrote in Bloomberg that he favors a 50 basis point rate hike at the coming Fed Meeting. He further noted that three Fed Members have publicly announced their wiliness to increase rate hikes by 50 basis points at coming meetings, despite all agreeing to raise rates by just 25 basis points at the Feb 1st meeting.

Federal Reserve member James Bullard is one of those three Fed members who have come out and announced he favors faster rate hikes in the future. Bullard believes inflation can be beaten in 2023, but only with aggressive rate hikes until it begins to come down. His concern is that inflation doesn’t come down but re-accelerates, and we are forced to relive the 1970s.

With the next Federal Reserve meeting just a few weeks away, now is the time to start planning your portfolio. There is a good possibility that even if rates aren’t increased aggressively at the March meeting, they will be increased multiple times over the coming meetings.

Despite what all the experts say and believe.

At this point, Jerome Powell and the Fed have made it very clear; if inflation persists, they will continue to increase interest rates. How aggressive the Fed will be with rate hikes is a guess at best. But it is pretty clear that rates will continue to climb if we continue to experience high inflation.

With that in mind, let us look at a few Exchange Traded Funds that you can buy to profit from increasing interest rates. You can use these positions for trading or hedges against the rest of your portfolio losing value as the stock market slides due to higher rates.

I like the ProShares Equities for Rising Rates ETF (EQRR), the SPDR S&P Regional Banking ETF (KRE), and the SPDR S&P Insurance ETF (KIE). All three of these ETFs are equity-focused funds that invest in companies that should perform well in a rising interest rate environment.

If you want an investment that is more leveraged to interest rates rising, as in they will perform well if rates rise, look at the next few.

The FolioBeyond Rising Rates ETF (RISR), the Simplify Interest Rate Hedge ETF (PFIX), and the WisdomTree Interest Rate Hedged US Aggregate Bond Fund (AGZD) all invest in options or short bonds. Thus, when interest rates go higher, these funds do well. For example, PFIX was among the top 10 best-performing non-leveraged ETFs in 2022. However, the other side of the coin is also true, and if rates don’t rise or decline, those three funds will not be fun to own.

The most important thing to remember is that the Federal Reserve is basing its rate hike decision on inflation. If inflation comes down, rate hikes will be small and slow. If inflation is persistent and continues to climb, the Fed will likely become more aggressive until inflation is tamed.

Watch the inflation numbers.

Those should tell you whether or not rates are going higher or stabilizing, and thus whether or not you should buy the ETFs mentioned above or begin selling them if you already own them.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.