3 ETFs That Thrive When the Fed Does Absolutely Nothing

Everyone expects the Federal Reserve to take action during crises, but the past few years have shown that the opposite is the case, as the Fed has preferred a more “hands-off” approach after record interest hikes. Thus, buying ETFs like Invesco KBW Bank ETF (NASDAQ:KBWB | KBWB Price Prediction), State Street SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP), Sprott Uranium Miners ETF (NYSEARCA:URNM) may be the best idea if the Fed keeps doing nothing.

There’s strong evidence to suggest that could be the case. While I expect a rate cut or two rate cuts this year, it is becoming increasingly unlikely that the Fed will cut aggressively. Crude oil prices are soaring and could leave a lasting impact on inflation. In turn, the Fed will get even more unwilling to cut rates.

While the upcoming Fed chair has said he would like to cut rates, he won’t be able to if inflation is climbing. The Fed is already deeply divided.

These ETFs can take advantage if that division morphs into paralysis, if it hasn’t already.

Invesco KBW Bank ETF (KBWB)

Banks are one of the clearest equity beneficiaries of a “no cut” scenario. Their net interest margins stay healthy when short-term rates remain elevated, especially with the yield curve having steepened somewhat.

KBWB has fully recovered from the 2023 “mini banking crisis,” though it is down over 15% from its recent peak. It’s a good buy-the-dip opportunity if the Fed keeps rates as-is. KBWB remains safer compared to most other banking ETFs as it holds the largest banks. Those who sold back in 2023 came to regret it, as money that left regional banks flowed straight into these stronger banks.

The ETF yields 2.25% with rising dividend growth. Its dividend growth rate in the past 3 years was just 2.94% annually, but has increased to 6.7% in the past 12 months. The expense ratio is also low at 0.35%, or $35 per $10,000.

Regardless of how the economy does, I don’t expect a bank run anytime soon. Even if the Fed does nothing with interest rates, it is likely to step in to help banks if things do go awry, especially under the current administration.

State Street SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

XOP is already up almost 30% this year, and most of those gains have happened even before the Strait of Hormuz was closed. It is only natural that countries will ramp up production or try to secure their own oil supply, the longer this goes on. The U.S. has plenty of oil in its own backyard and in Venezuela to explore and produce from. This is why XOP has been surging, and I expect the latest conflict to light a fire under it, independent of what the Fed does.

If oil drops, XOP will fall. But in a regime where the Fed is frozen partly because of energy-driven inflation, that risk profile is also your return profile.

XOP gets you a near-2% dividend yield with an expense ratio at 0.35%. Hormuz-related fear could drive XOP to $200 or higher, because I expect the stocks it holds to be massive beneficiaries. The largest holdings of XOP are U.S.-based oil producers, and they will make plenty of money from higher oil prices at the pump without having any of their facilities hit or shut down.

Sprott Uranium Miners ETF (URNM)

Uranium has solid tailwinds from not just the data center narrative, but also from the explosion in oil prices. Data centers need stable power to maintain their uptime, and this is not possible at scale with the current grid. Nuclear power is the best solution, with small modular reactors (SMR) gaining popularity.

URNM has thus gained over 91% in just the past year, and I see much more upside as countries keep expanding their uranium reserves due to the commodity becoming more strategic. If there’s no shake-up from the Federal Reserve, the market will likely stay on course, which benefits URNM. Justin Huhn of Uranium Insider stressed that the world will need to supply 250 to 300 million pounds a year in about 10 years, and we’re probably going to need prices in the $125 to $150 range, sustained. Uranium trades at around $85 today.

The ETF comes with a dividend yield of 2.73% and an expense ratio of 0.75%. The expense ratio is quite low for a fund growing this fast.