The U.S. labor market continued its strength with steady job gains in July, which were enough to increase the chances of the Fed pulling its trigger on the first rate hike in almost a decade as early as next month. The Fed in its last FOMC meeting stated that it is on track to increase interest rates albeit at a slower pace if the job market shows further improvement. And this is exactly what happened (read: 5 ETFs Strategies to Prepare for Higher Rates).

The U.S. economy added 215,000 jobs in July driven by higher construction and manufacturing employment that more than offset the collapsing mining sector. Though the number was marginally below the market expectation of 225,000, unemployment remained steady at seven-year low of 5.3%.

Additionally, average hourly wages rose five cents to $24.99, bringing the year-over-year increase to 2.1%. Jobless claim were the lowest level since June 2008 at 10.4% against 10.5% in June. Further, the economy appears closer to full employment given that the number of full-time U.S. jobs as a share of total employment reached to 81.7%, marking the highest level since November 2008.

The decent job data suggests that the economy continued to gain momentum in July after growing 2.3% in the second quarter. To make the case for rates hike stronger, a surging service sector, increasing business activity, higher consumer spending, a recovering retail and housing market, and rising consumer confidence point to even strong economic growth that would translate into more jobs and the resultant higher rates.

ETFs to Watch

The news has extended the losing streak for the Dow Jones Industrial Average to the seventh day – the longest since August 2011. Additionally, the index is currently hovering at its six-month low. As a result, a few ETFs were severely impacted by the solid jobs data while a few are expected to gain in the weeks ahead (read: 4 Inverse ETFs That Soared Over 50% in July).

Below, we have highlighted some that are especially volatile post jobs data and increased chances of rates hike:

ETFs to Lose

SPDR Gold Trust ETF ((GLD - ETF report))

Gold will continue to remain under immense pressure as higher interest rates would diminish gold’s attractiveness since the yellow metal does not pay interest like fixed-income assets and the product tracking this bullion like GLD will lose further. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA.

It is the ultra-popular gold ETF with AUM of $23.5 billion and average daily volume of around 5.7 million shares a day. Expense ratio came in at 0.40%. The fund is down 7.9% so far in the year and has a Zacks ETF Rank of 3 or ‘Hold’ rating.

iShares MSCI Emerging Markets ETF ((EEM - ETF report))

As the Fed moves closer to interest rate hike, emerging markets will slump further. The most popular emerging market ETF - EEM - lost about 7% in the year-to-date timeframe and has seen huge capital outflow which has pulled its total asset base down to $24.2 billion. The fund tracks the MSCI Emerging Markets Index and charges 68 bps in annual fees from investors (read: July Asset Flow Roundup: US Tops, EM Lags). 

Holding 847 securities, the product is widely spread out across various securities but is tilted toward the financial sector at 29.3%, followed by information technology (17%). Among the emerging countries, China takes the top spot at 23.6% while South Korea and Taiwan round off the next two spots with double-digit exposure each. The fund has a Zacks ETF Rank of 3.

iShares 20+ Year Treasury Bond ETF ((TLT - ETF report))

The U.S. government bonds and ETFs tracking the long end of the yield curve are the most vulnerable to higher interest rates. The ultra-popular long-term Treasury ETF – TLT – tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and has AUM of $4.9 billion. Expense ratio came in at 0.15%. Holding 29 securities in its basket, the fund focuses on the top credit rating bonds with average maturity of 26.9083 years and effective duration of 17.2035 years. The fund is almost flat from a year-to-date look and has a Zacks ETF Rank of 3.

ETFs to Gain

PowerShares DB US Dollar Bullish Fund ((UUP - ETF report))

A rise in interest rates will pull in more capital into the country and lead to further appreciation of the U.S. dollar. UUP is the prime beneficiary of the rising dollar as it offers exposure against a basket of six world currencies – euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities (read: Top ETF Stories of July).

In terms of holdings, UUP allocates nearly 58% in euro while 25.5% collectively in Japanese yen and British pound. The fund has so far managed an asset base of $1.3 billion while sees an average daily volume of around 2.6 million shares. It charges 80 bps in total fees and expenses and has added 6.5% in the year-to-date time frame. The fund has a Zacks ETF Rank of 2 or ‘Buy’ rating.

Deutsche X-trackers MSCI EAFE Hedged Equity ETF ((DBEF - ETF report))

The strength in the greenback is compelling investors to recycle their portfolio into the currency hedged ETFs. For those seeking exposure to the developed market with no currency risk, DBEF could be an intriguing pick. The fund follows the MSCI EAFE US Dollar Hedged Index and holds 913 securities in its basket with none accounting for more than 1.82% share (read: Top Ranked Currency Hedged ETFs in Focus on Dollar Surge).

However, it is skewed toward the financial sector, which makes up for more than one-fourth of the portfolio, while consumer discretionary, industrials, health care, and consumer staples round off the top five with double-digit exposure each. Among countries, Japan takes the top spot at 21%, closely followed by United Kingdom (19%), France (10%) and Switzerland (10%). The ETF has AUM of $14.4 billion and trades in a solid volume of more than 4.7 million shares a day. It charges 35 bps in fees per year from investors and has a Zacks ETF Rank of 3.

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