Sector ETFs Sensitive to Rising Rates | ETF Trends

If the Federal Reserve moves toward interest rate normalization in December, some market segments and sector exchange traded funds could underperform during the rising rate environment.

Erin Gibbs of S&P Investment Advisory Services is singling out the industrial and materials sector since both higher rates and a stronger dollar would put pressure on these two market segments, reports Stephanie Yang for CNBC.

For ETF investors, that could spell trouble for industrial sector-specific funds, including the Industrial Select Sector SPDR (NYSEArca: XLI), Vanguard Industrials ETF (NYSEArca: VIS), iShares U.S. Industrials ETF (NYSEArca: IYJ) and Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU).

Gibbs, though, believes that the materials sector could stand to suffer the most. Investors may want to keep an eye on the Materials Select Sector SPDR (NYSEArca: XLB), Vanguard Materials ETF (NYSEArca: VAW) and iShares U.S. Basic Materials ETF (NYSEArca: IYM).

“Obviously these are both heavily tied to the dollar story,” Gibbs told CNBC. “But I think the most vulnerable fundamentally is really the materials sector.”

The materials sector has been suffering under a stronger dollar, which has diminished foreign revenue streams and weighed on commodity prices.