Market pressure from interest rate hike, how to invest US ETF in 2022?

In recent years, the scale of ETF products has risen rapidly, and ETF-related investments have increasingly attracted the attention of investors, especially emerging market ETFs. Higher national growth rates have translated into higher returns for investors. However, investing in these markets also means taking certain risks, given that emerging market stocks are generally more volatile and vulnerable to geopolitical, currency, and governance risks, among others.

 

U.S. stock ETFs are incredibly mature and have high-performance stability. As a result, global investors, especially individual investors, also favour them. Today, we will focus on the characteristics of U.S. stock ETFs including which products are currently performing well. In addition, we hope to provide more information to investors who are just getting started investing in  ETFs.

 

An ETF, also known as an “exchange-traded index fund”, is a fund that tracks a specific basket of stocks authorized by the US Securities and Futures Commission (SFC) and is traded on an exchange. The buying and selling procedures and costs of ETFs are similar to those of ordinary stocks, except that instead of buying individual stocks, you will be buying a collection of stocks held by the fund. In addition, buying one ETF will give you access to multiple stocks in the form of funds. Therefore, buying at ETFs is equivalent to buying all the index’s constituent stocks.

 

In terms of diversity, the advantages of U.S. stock ETFs are pretty obvious. They lead the world in terms of quantity, variety, and scale. The US markets are incredibly mature, with current data showing that the number of ETFs in the United States exceeds 2,000, and the assets held by ETFs exceed 6.25 trillion US dollars. ETFs are financial products that cover stocks, bonds, commodities, real estate, foreign exchange, volatility, etc. We even have special ETFs such as inverse and leveraged ETFs.

 

Secondly, ETFs have more stability and are more suitable for individual investors and beginners. According to the annual report on the development of the global ETF industry released by the Shenzhen Stock Exchange, the average annual compound growth rate of US ETFs over the past ten years was 18.4%. Furthermore, ETFs have the characteristic of risk diversification and are suitable for medium and long-term investments. Investors can hold them as fixed investment assets for a long time. One can hold several ETFs with good liquidity at the same time to better diversify their investment risk. Due to the high transparency of US stock ETFs, real-time price transactions can be carried out just like in the overall stock market.

 

However, many investors are generally worried about the domestic inflation problem in the United States. Now the world is facing a wave of interest rate hikes. The Federal Reserve has announced that it will accelerate the reduction of its bond purchases and initiate multiple interest rate hikes this year, which has caused great uncertainty regarding the stock market’s prospects. The Fed’s future actions will inevitably make investors worry about the impact they would have on the performance of ETFs. The chief U.S. stock market strategist warned investors that the S&P index and broader market is expected to drop an average of 6% in the three months following the first rate hike by the Fed. Value, cyclical, and high-quality stocks tend to outperform the broader market within half a year after the beginning of rate hikes, but high-value growth stocks perform the worst over the same period.

 

In case of high inflation, investors are advised to pay attention to particular stocks related to the real estate and finance sectors when picking stocks. I believe these are concept stocks that will benefit from interest rate hikes and can help investors’ overall investment portfolio beat inflation. Last year, these types of ETFs also had excellent performance. If the inflation problem becomes more severe, investors could also consider buying real estate ETFs with stable dividend yields. Furthermore, the diversity of U.S. stocks enables them to respond more flexibly and effectively to complex market changes.

 

Regarding stock selection, the ETFs that performed best last year were mainly energy ETFs, and many believe that this trend will continue in 2022.  Affected by factors such as tight global supply chains, growing demand, and the military conflict between Russia and Ukraine, crude oil prices keep rising. Market participants were generally optimistic about the crude oil market earlier this year, but there is significant uncertainty in the oil markets now. However, it is worth mentioning that the seaborne ETF was the ETF with the highest gain last year. The Breakwave Dry Bulk Shipping ETF, which tracks the Baltic Dry Bulk Index (BDI), rose by over  244% last year. As the supply chain tensions will not ease in the short term and the global pandemic continues to spread, the number of available dry bulk and container ships in the world will remain tight this year. Therefore, it is expected that the performance of BDI will still be quite decent this year, and investors should pay close attention to the ETF.

 

In addition to the ETF sector types mentioned above, other U.S. stock ETFs covering commodities, banks, and transportation also have good investment prospects; hence, investors have many ETF choices. When the stock market faces significant uncertainty, it is often best to choose ETFs to hedge your risks, especially in the case of short-term volatility.  Buying leveraged ETFs could also help you protect your existing assets, but they come with additional risks.

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