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After a blockbuster 2023, Wall Street lost its momentum at the start of 2024 on overvaluation concerns and uncertainty about the timing of Fed rate cuts.
The latest data on inflation and jobs has dampened market expectations about an interest rate cut as soon as March. The latest Fed minutes also showed that the central bank wouldn’t cut rates as aggressively as expected for this year. This suggests an uncertain path toward interest rate cuts and reflects a growing sense that inflation is under control.
While the timing of interest rate cuts is uncertain, the Fed had penciled in three rate cuts for this year in its last meeting. This shift in the Fed monetary policy approach is the result of a gradual control of inflation and its aim to support a stable economic environment without triggering a recession or a significant rise in unemployment.
Given the current market environment, we have highlighted some investing strategies that could prove to be extremely beneficial for investors:
Make Rate Sensitive Sectors Your Friend
Lower interest rates can positively impact sectors like real estate, consumer discretionary and financial services, which are typically sensitive to interest rate changes. In real estate, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can compress net interest margins for banks on the one hand, on the other, they can encourage lending and potentially lead to increased consumer and business loan activity.
Some of the ETFs having concentrated exposure to the particular sector are Real Estate Select Sector SPDR ETF (XLRE - Free Report) , Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) and Vanguard Financials ETF (VFH - Free Report) . All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting outperformance in the coming months (read: Sector ETFs to Benefit From Fed Rate Cut Talks).
Add Value to Your Portfolio
Value investing showed a nice comeback in the initial weeks of 2024, which indicates a big reversal from 2023, where growth investing took charge. Value investing involves buying stocks that are believed to be undervalued or trading below their intrinsic value. Amid overvaluation concerns, these stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts.
While most of the funds in the value space seem excellent choices, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF (IWD - Free Report) and iShares S&P 500 Value ETF (IVE - Free Report) have a Zacks ETF Rank #1 each.
Bet on Quality
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
Among the most popular are iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barron's 400 ETF (BFOR - Free Report) .
Focus on Small-Caps
The Fed’s dovish outlook has made future credit conditions better. Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves (read: US Small Business Optimism Rises in December: 5 ETF Picks).
Zacks Ranked #2 ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ iShares Russell 2000 ETF (IWM - Free Report) , Vanguard Small-Cap ETFVB, and Schwab U.S. Small-Cap ETFSCHA could be better plays going forward.
Emphasis on Dividends
The decline in interest rates will lead to investors’ drive for higher yields, thereby raising the appeal for dividend investing. One of the primary benefits of dividend investing is the steady stream of income generated through dividend payouts. Even if the market is volatile due to uncertainties around the Fed's future actions, dividend-paying stocks can provide a consistent income stream.
In particular, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETFDGRO have a Zacks ETF Rank #1.
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5 ETF Tactics for Your Portfolio in 2024
After a blockbuster 2023, Wall Street lost its momentum at the start of 2024 on overvaluation concerns and uncertainty about the timing of Fed rate cuts.
The latest data on inflation and jobs has dampened market expectations about an interest rate cut as soon as March. The latest Fed minutes also showed that the central bank wouldn’t cut rates as aggressively as expected for this year. This suggests an uncertain path toward interest rate cuts and reflects a growing sense that inflation is under control.
While the timing of interest rate cuts is uncertain, the Fed had penciled in three rate cuts for this year in its last meeting. This shift in the Fed monetary policy approach is the result of a gradual control of inflation and its aim to support a stable economic environment without triggering a recession or a significant rise in unemployment.
Given the current market environment, we have highlighted some investing strategies that could prove to be extremely beneficial for investors:
Make Rate Sensitive Sectors Your Friend
Lower interest rates can positively impact sectors like real estate, consumer discretionary and financial services, which are typically sensitive to interest rate changes. In real estate, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can compress net interest margins for banks on the one hand, on the other, they can encourage lending and potentially lead to increased consumer and business loan activity.
Some of the ETFs having concentrated exposure to the particular sector are Real Estate Select Sector SPDR ETF (XLRE - Free Report) , Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) and Vanguard Financials ETF (VFH - Free Report) . All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting outperformance in the coming months (read: Sector ETFs to Benefit From Fed Rate Cut Talks).
Add Value to Your Portfolio
Value investing showed a nice comeback in the initial weeks of 2024, which indicates a big reversal from 2023, where growth investing took charge. Value investing involves buying stocks that are believed to be undervalued or trading below their intrinsic value. Amid overvaluation concerns, these stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts.
While most of the funds in the value space seem excellent choices, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF (IWD - Free Report) and iShares S&P 500 Value ETF (IVE - Free Report) have a Zacks ETF Rank #1 each.
Bet on Quality
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.
Among the most popular are iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barron's 400 ETF (BFOR - Free Report) .
Focus on Small-Caps
The Fed’s dovish outlook has made future credit conditions better. Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. As small-cap companies are more domestically tied, these are poised to outperform when the economy improves (read: US Small Business Optimism Rises in December: 5 ETF Picks).
Zacks Ranked #2 ETFs like iShares Core S&P Small-Cap ETF (IJR - Free Report) ¸ iShares Russell 2000 ETF (IWM - Free Report) , Vanguard Small-Cap ETF VB, and Schwab U.S. Small-Cap ETF SCHA could be better plays going forward.
Emphasis on Dividends
The decline in interest rates will lead to investors’ drive for higher yields, thereby raising the appeal for dividend investing. One of the primary benefits of dividend investing is the steady stream of income generated through dividend payouts. Even if the market is volatile due to uncertainties around the Fed's future actions, dividend-paying stocks can provide a consistent income stream.
In particular, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF DGRO have a Zacks ETF Rank #1.