If the Fed Raises Rates This Year, I'm Loading Up on This 1 ETF

At its June meeting, the Federal Open Market Committee (FOMC) made a notable shift in its collective thinking regarding the economy and interest rates.

In the FOMC's June summary of projections, or dot plot, the median of the members' rate projections points to at least one rate hike in 2026. In March, the median projection on the committee had indicated a rate reduction would be coming in 2026. The dot plots for December and September 2025 also indicated one rate cut in 2026.

The minutes from the June 17 FOMC meeting said:

Most participants, however, also pointed to scenarios in which, in the context of stable labor market conditions, inflation would remain elevated due to strong [artificial intelligence] AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2%.

Image source: Getty Images.

"Firming" is another way of saying "raising rates."

While that doesn't mean a rate hike is certain, it is definitely on the table right now. If the Federal Reserve were to raise rates, here's one exchange-traded fund (ETF) I'd load up on.

Higher rates would benefit banks

Higher interest rates are generally seen as negative for growth and smaller-cap stocks. That's because higher rates raise the cost of borrowing, and that could place a drag on the ability of growth companies or smaller firms to grow.

But the type of company that benefits in that scenario is the lender, the banks. When rates are higher, they can charge higher interest on their loans, thus increasing their interest income -- a big part of their revenue.

Specifically, the large super regional and national banks would benefit the most, because they can typically keep their deposit rates the same or close to the same due to the abundance of services they offer and their stability. Most customers won't leave their big bank to go fishing for higher deposit rates if the difference is minimal.

When higher rates become a negative for banks, it's when they rise too high, too fast. If that happens, as it did in 2022 and 2023, fewer people will borrow, and that would hurt banks. But I don't see that scenario playing out here.

The economy is fairly strong, and most FOMC members indicate this would be a one-off rate increase, with rates projected to stay flat or move back down over the next few years. So, it's really a good spot for big banks to be in.

Load up on this bank ETF

For these reasons, if the Fed does raise rates later this year, I'd load up on a bank ETF, specifically the Invesco KBW Bank ETF (NASDAQ: KBWB). This ETF tracks the KBW Nasdaq Bank Index, which comprises the 26 largest banks in the country. These are the banks that will benefit the most from a single rate cut.

Its top three holdings are Bank of America, JPMorgan Chase, and Wells Fargo.

The ETF is up 11% year to date, but 15% with the dividend reinvested. As it invests in large banks, it has a solid 1.97% 12-month yield distribution rate. Over the past year, it has a total return of 33%, and its five- and 10-year average annual total returns are 12% and 14.4%, respectively.

Wells Fargo is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.