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September Rate Cut Bets Make These ETFs Attractive
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Rate cut bets ramped up again following the slew of latest data, which signal a slowdown in the world's largest economy. Traders now see a 78% chance of a September rate by the U.S. central bank, according to CME's FedWatch tool. Traders are also pricing in a rising chance of a second rate cut in December.
The U.S. economy added robust 206,000 jobs in June, but the unemployment rate rose from 4% to 4.1%, the highest rate since November 2021. Average hourly earnings growth also slowed, rising 0.3% after advancing 0.4% in May. Year over year, wages increased 3.9%, the smallest gain since June 2021, and followed a 4.1% rise in May. Meanwhile, the U.S. services sector contracted in June at the fastest pace in four years.
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 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: Top-Ranked ETFs That Outperformed the Market in 1H).
Lower rates will also have a positive impact on consumer discretionary and financial services. Reduced borrowing costs can lead to increased consumer spending for consumer discretionary sectors. 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 will also continue to shine as lower interest rates will increase the metal’s attractiveness.
Given this, we have highlighted ETFs from sectors that are set to explode following a rate cut.
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 159 stocks in its basket, with none accounting for more than 13.2% 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 $32 billion and an average daily volume of around 3.4 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 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 $2.5 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 Boost Gains Amid Rising Rate Cut Expectations).
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 $20 billion and an average daily volume of around 3 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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 6 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (read: ETF Strategies for Second Half of 2024).
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 $11.3 billion and an average trading volume of 5 million shares a day. It has a Zacks ETF Rank #3 with a Medium risk outlook.
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September Rate Cut Bets Make These ETFs Attractive
Rate cut bets ramped up again following the slew of latest data, which signal a slowdown in the world's largest economy. Traders now see a 78% chance of a September rate by the U.S. central bank, according to CME's FedWatch tool. Traders are also pricing in a rising chance of a second rate cut in December.
The U.S. economy added robust 206,000 jobs in June, but the unemployment rate rose from 4% to 4.1%, the highest rate since November 2021. Average hourly earnings growth also slowed, rising 0.3% after advancing 0.4% in May. Year over year, wages increased 3.9%, the smallest gain since June 2021, and followed a 4.1% rise in May. Meanwhile, the U.S. services sector contracted in June at the fastest pace in four years.
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 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: Top-Ranked ETFs That Outperformed the Market in 1H).
Lower rates will also have a positive impact on consumer discretionary and financial services. Reduced borrowing costs can lead to increased consumer spending for consumer discretionary sectors. 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 will also continue to shine as lower interest rates will increase the metal’s attractiveness.
Given this, we have highlighted ETFs from sectors that are set to explode following a rate cut.
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 159 stocks in its basket, with none accounting for more than 13.2% 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 $32 billion and an average daily volume of around 3.4 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 $2.5 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 Boost Gains Amid Rising Rate Cut Expectations).
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 $20 billion and an average daily volume of around 3 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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 6 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (read: ETF Strategies for Second Half of 2024).
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 $11.3 billion and an average trading volume of 5 million shares a day. It has a Zacks ETF Rank #3 with a Medium risk outlook.