For ETF Investors, It's All About Yellen

Given the strength of the October jobs report, U.S. employers added 271,000 new jobs last month, it was disappointing to see stocks end the week in lethargic fashion. On the bright side, the S&P 500 and the Dow Jones Industrial Average each gained more than one percent on the week and are on their best weekly winning streaks since October 2014.

That strong jobs report could be all the impetus the Federal Reserve needs to raise interest rates at its December meeting and traders are acting as though a rate hike next month is a foregone conclusion. On Thursday, Fed funds futures reflected a less than 60 percent chance of a rate hike next month, but on the back of the October jobs report, that number jumped to 70 percent.

With increasingly higher odds that interest rates are going to imminently rise, market participants have a somewhat clear playbook for the days ahead. Looking for the exchange traded funds that merit attention and scrutiny in the week ahead is not difficult because many of the funds we'll explore here are, for better or worse, highly sensitive to interest rates.

Predictably, the Utilities Select Sector SPDR XLU and rival utilities ETFs are being taken to the woodshed. XLU, the largest utilities ETF, slid 3.5 percent Friday on volume that was more than double the daily average, bring its weekly loss to 3.6 percent. That is to say nearly all of the damage incurred by XLU in the just completed week occurred on Friday, but that underscores the fact that of the nine established sector SPDR ETFs, XLU is the most negatively correlated to rising interest rates. 

Where there are interest rate losers, there are also winners. With that, we turn our attention to the SPDR S&P Regional Banking ETF KRE. KRE, the largest regional bank ETF, jumped three percent Friday on nearly triple the average daily turnover. That extended KRE's weekly gain to 7.2 percent, good for one of the best weekly showings among all non-leveraged ETFs.

History paints a different picture of just how positive higher interest rates for bank stocks, but that is well, history. In anticipation of higher rates benefiting the likes of KRE, perception is reality and the perception is a hawkish Fed is good for regional banks. 

A theme that has been highlighted many times in recent weeks is the popularity of fixed income ETFs in the fourth quarter. Since the start of the quarter, four of the top 10, including each of the top three, asset-gathering ETFs are bond funds. That data pertains to the period ending Nov. 5. Obviously, Friday was Nov. 6, so there could have been significant departures from bond ETFs on that day.

What is interesting is that several of the ETF's most afflicted by outflows this quarter have been short duration bond funds that should be favored by investors ahead of higher interest rates. The iShares Barclays 1-3 Year Treasury Bond ETF SHY and the SPDR Barclays 1-3 Month T-Bill ETF BIL merit consideration in the weeks ahead.