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Sector ETFs to Profit as Rate Cut Bets Rise

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Rate cut bets ramped up again following the latest bouts of data, which signal a slowdown in the world's largest economy. Traders now see a nearly 69% chance of a September rate reduction, according to the CME's FedWatch tool, compared with around 50% last week.

U.S. manufacturing activity slowed for the second straight month in May, and U.S. construction spending fell unexpectedly for the second consecutive month in April on declines in non-residential activity. The latest PCE inflation data revealed that U.S. inflation had stabilized in April, suggesting that the U.S. central bank’s interest rate cut plans later this year remained intact.

Additionally, the Bank of Canada’s decision to lower its benchmark rate for the first time in four years and the European Central Bank’s rate cut decision for the first time since 2019 also fueled optimism over a looser monetary policy.

A Boon for Sectors

Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and thus provides a boost to the stock market.

In particular, high-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries of the rate cuts, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. In real estate, lower rates can boost housing market activity by making mortgages more affordable. Additionally, securities in capital-intensive sectors like telecom will also benefit from lower rates. Businesses will also face lower loan rates over time (read: Leverage the Power of Utilities & Small-Caps With These ETFs).

Further, lower rates will also have a positive impact on consumer discretionary and financial services. 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, they can also encourage lending and potentially lead to increased consumer and business loan activity.

Moreover, Fed rate cuts tend to boost foreign capital inflows into emerging markets like India. As the outlook for India’s economy remains strong, rate cuts will boost foreign capital inflow, which can lead the market to new highs. Gold, which has gained momentum lately on safe-haven demand due to increased geopolitical tension, will also continue to shine as lower interest rates would increase the metal’s attractiveness.

Given this, we have highlighted ETFs from sectors that are set to explode on lower rates.

ETFs to Gain

Vanguard Real Estate ETF (VNQ - Free Report)

Vanguard Real Estate ETF targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 158 stocks in its basket, with none accounting for more than 13% share. VNQ has key holdings in retail REITs, telecom tower REITs and industrial REITs with double-digit exposure each.

Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $31.8 billion and an average daily volume of around 4 million shares a day. It charges 13 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB - Free Report)

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.

With an AUM of $2.7 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks, with a heavy concentration on the top two firms. The product charges 40 bps in annual fees and trades in a heavy volume of around 2 million shares a day, on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3 with a High risk outlook (read: ETFs to Play as Mortgage Rates Look Likely to Fall).

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 52 securities in its basket, with key holdings in broadline retail, hotels, restaurants and leisure, specialty retail, and automobiles with a double-digit allocation each.

Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $18.5 billion and an average daily volume of around 4 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 Beaten-Down Top-Ranked ETFs to Buy for a Turnaround).

SPDR Gold Trust ETF (GLD - Free Report)

SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $62.5 billion and a heavy volume of about 9 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3.

iShares MSCI India ETF (INDA - Free Report)

iShares MSCI India ETF offers exposure to large and mid-cap companies in India by tracking the MSCI India Index and charging 65 bps in fees per year from investors. Holding 146 stocks in its basket, the fund has key exposure in financials, consumer discretionary, information technology and energy.

iShares MSCI India ETF is the largest and the most popular ETF in this space, with AUM of $10.3 billion and an average trading volume of 4.4 million shares a day. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: India ETFs to Soar on Likely Modi Win).

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