NEW YORK (TheStreet) -- Whether interest rates will go up this year (and when) is Wall Street's latest focal point. Anything that keeps rates lower for longer is perceived to be good news.
Nevertheless, most analysts believe that a rate hike is inevitable. The question is not if, but when. So, let's step into our time machine and set the dial to the day the Fed raises rates.
When the time machine stops spinning and we get out, what ETFs would we like to own to be prepared for this day? What about the ETFs we absolutely don't want to have in our portfolios? Here is a list of 10 ETFs that should either benefit or be adversely affected by rising rates.
This pick might come as a surprise. Investors are obviously concerned that a rate hike will sink stocks. That's one of many Wall Street myths, and here's a chart that proves it's not true.
Quite the opposite it true. An analysis of the past six decades shows that the S&P 500 did quite all right during periods of rising rates.
Since 1954, there have been 13 periods of rising rates and the S&P 500 declined during only four. However, this bull market is 73 months old, and timing becomes more important in the later stages of a bull market.
The SPDR S&P 500 ETF will become attractive again at lower prices. Buying after a summer correction will reduce the implied risk of chasing all-time highs.
Higher interest rates translate into more interest income, especially for baby boomers. Consumer discretionary stocks, which include restaurants, home improvement and entertainment companies, may benefit from extra discretionary spending.
The Consumer Discretionary Select Sector SPDR ETF is trading at an all-time high. Significant technical chart support is around $69, $65 and $61. Rather than chasing this ETF, it is more prudent to wait for pullbacks or corrections and buy around support.
It's said that rising rates are a boon for banks and financial stocks. When banks get to charge more for loans, profits soar.
Now would be a good time to discuss the difference between the federal funds rate and the yield curve.
The federal funds rate is the rate every one is talking about (the interest rate that the Fed may or may not raise). The federal funds rate is the central interest rate in the U.S. financial system. It is the interest rate at which depository institutions trade balances held at the Federal Reserve with each other overnight.
However, banks like to borrow money (from the Fed or other banks) at short-term rates and lend out money (to consumers) at long-term rates. Therefore the spread between short-and long-term rates (called the yield curve) is more important for bank profits than the federal funds rate.
Many investors don't know about this detail and mass perception that rising rates are good for bank stocks (and fewer loan defaults) may drive the Financial Select Sector SPDR ETF higher. Similar to other equity ETFs, only buy on dips or as pair trade.
The Federal Reserve raises the federal funds rate by injecting liquidity into the system. This liquidity comes from selling government bonds.
Theoretically, this interrupts the balance between bond buyers and sellers (more supply) and sends Treasury prices lower.
However, historic evidence does not agree with this theory. Rising interest rates are actually no reason to bail out of Treasury bonds (or buy TBF).
A better reason is that the 34-year Treasury bull market will come to an end eventually. When it does, the ProShares Short 20+ Year Treasury ETF will benefit.
TIPS stands for Treasury Inflation-Protected Securities. TIPS are issued by the U.S. Treasury. Their face value is adjusted according to the inflation rate (interest is paid on the adjusted face value). At maturity, TIPS investors will receive the original face value plus the sum of all the inflation adjustments since the bond was issued.
The iShares TIPS Bond ETF provides exposure to TIPS. The average maturity rate is 8.55 years. Bond maturity and face value are directly correlated. Longer-term bonds are more sensitive to interest rate moves than shorter-term bonds.
The iShares TIPS Bond ETF comes with a degree of fluctuation. The trading range since 2009 has been from $92.5-to-$123.
Rising interest rates are likely to buoy mortgage rates. Higher mortgage rates make buying a home less attractive, which in turn may result in softer real estate prices.
This scenario, at least on paper, makes the ProShares Short Real Estate ETF attractive. However, real estate ETFs not only react to home price developments, they are also subject to the forces of the stock market. The stock market up trend has yet to be broken.
Therefore, the ProShares Real Estate ETF is not a pure play on falling home prices, but also a bet on falling stocks. This ETF is not ripe to buy (yet).
The utility business is very capital extensive. It takes money to develop and maintain utility (electricity, water, gas) infrastructure and operations. Utility companies finance much of the needed funds, and are thus interest sensitive.
Furthermore, because of its relatively high dividend payout, when rates move up, utility stocks lose some of their luster.
Rising rates are unlikely to sink the utility sector, but utility stocks should underperform the S&P 500 or sectors like consumer discretionary and financials.
A pair trade is one way to profit from utility underperformance. This pair trade could be to sell XLU and buy SPY, or sell XLU and buy XLY, or sell XLU and buy XLF. The net performance will reflect the outperformance of SPY, XLY or XLF relative to XLU.
Don't go out and buy this ETF just yet, because this is another pair trade.
In a low interest environment, investors are scouring for high yields and dividends. When interest rates rise, high yield and dividend ETFs become less attractive.
Theoretically, this should cause growth ETFs to outperform dividend ETFs. A pair trade designed to take advantage of this is to buy the iShares Russell 1000 Growth ETF and sell ETFs like the SPDR S&P Dividend ETF (SDY) - Get Report.
A word of caution: Towards the later stages of a bull market, investors become more cautions and may prefer value over growth. This could limit the relative outperformance of growth vs dividend.
In search for income, investors have been piling into high yield bonds. High yield is just a polite term for junk when discussing bonds.
The allure of junk will fade in a higher interest environment.
The ProShares Short High Yield ETF is only thinly traded, but it represents a worthwhile opportunity.
The last option is an out-of-the-box pick, that benefits more from high security than high rates.
The PureFunds ISE Cyber Security ETF has only been around since December 2014, but it capitalizes on the need for more cyber security. This ETF is up nearly 30% since December.
As any emerging opportunity fund, this ETF may turn out to be quite volatile. Support around $27 looks to be a good entry point.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.