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The stock market has been witnessing wild swings this month due to concerns over an economic slowdown. However, the Fed minutes released yesterday infused some optimism as most officials favored a September rate cut if inflation continued to cool. The interest rate has remained at 5.3%, a near-quarter-century high, since July 2023.
Sector ETFs, which are the major beneficiaries of a rate cut, rallied to new 52-week highs. Some of these include Vanguard Real Estate ETF (VNQ - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) , iShares Evolved U.S. Discretionary Spending ETF (IEDI) , Global X Gold Explorers ETF (GOEX - Free Report) and Invesco DWA Technology Momentum ETF (PTF - Free Report) .
The rounds of economic data point to a slowdown in the economy, reinforcing bets that policymakers will cut interest rates in September. The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose to 4.3% — the highest since October 2021 — and represented the fourth consecutive monthly increase. U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders (read: Stocks Log Best Week of the Year: Winning ETFs).
Additionally, a big downward revision in U.S. payrolls for the 12-month period through March 2024 supports the rate cut bets. The Bureau of Labor Statistics’ preliminary annual benchmark review of employment data showed that the U.S. economy created 818,000 fewer jobs last year than originally reported. It marks the largest downward revision since 2009 and shows that the labor market wasn’t quite as red-hot as initially thought.
Market participants are now pricing in a 100% chance of a rate cut next month, according to CME Group’s FedWatch tool. 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.
Rate Cuts: A Boon
High-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries of a rate cut, 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.
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 (read: Rate Cut in the Cards? ETFs to Play).
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.
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 155 stocks in its basket, with none accounting for more than 13.4% 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 $35.4 billion and an average daily volume of around 3.5 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. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 44 securities with a slight tilt toward the top firm at 12.2%, while others make up for less than 7.2%. Here again, electric utilities dominate the portfolio at 57.6%, followed by multi utilities (22.5%).
iShares U.S. Utilities ETF has amassed $1.4 billion in its asset base while trading in a good volume of 158,000 shares a day on average. The fund charges 40 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: How AI Power Demand is Boosting Utility ETFs).
iShares U.S. Consumer Focused ETF is an actively managed ETF providing exposure to U.S. companies with a focus on U.S. consumer spending and consumer goods. It holds 201 stocks in its basket, with key holdings in consumer discretionary, consumer staples distribution & retail, and consumer services.
iShares U.S. Consumer Focused ETF has accumulated $22.2 million in its asset base and charges 18 bps in fees per year. Volume is paltry for IEDI as it exchanges 3,000 shares a day, on average.
Global X Gold Explorers ETF provides exposure to companies involved in the exploration of gold deposits and tracks the Solactive Global Gold Explorers & Developers Total Return Index. It is home to 50 stocks. Canadian firms dominate the fund’s return at 50.4%, followed by Australia (26.6%) and the United States (9.9%).
Global X Gold Explorers ETF is unpopular and illiquid, with AUM of $41.8 million and an average daily volume of 3,000 shares. The expense ratio comes in at 0.65%.
Invesco DWA Technology Momentum ETF offers exposure to 35 tech companies that are showing relative strength (momentum) by tracking the Dorsey Wright Technology Technical Leaders Index. Semiconductor & Equipment takes the largest share at 37.7%, followed by software (30.4%) and diversified telecom services (11.3%) (read: 5 Technology ETFs at the Forefront of the August Rebound).
Invesco DWA Technology Momentum ETF is relatively illiquid and unpopular, with AUM of $460.2 million. It charges 60 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.
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5 Sector ETFs Scaling New Highs on Fed Minutes
The stock market has been witnessing wild swings this month due to concerns over an economic slowdown. However, the Fed minutes released yesterday infused some optimism as most officials favored a September rate cut if inflation continued to cool. The interest rate has remained at 5.3%, a near-quarter-century high, since July 2023.
Sector ETFs, which are the major beneficiaries of a rate cut, rallied to new 52-week highs. Some of these include Vanguard Real Estate ETF (VNQ - Free Report) , iShares U.S. Utilities ETF (IDU - Free Report) , iShares Evolved U.S. Discretionary Spending ETF (IEDI) , Global X Gold Explorers ETF (GOEX - Free Report) and Invesco DWA Technology Momentum ETF (PTF - Free Report) .
The rounds of economic data point to a slowdown in the economy, reinforcing bets that policymakers will cut interest rates in September. The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose to 4.3% — the highest since October 2021 — and represented the fourth consecutive monthly increase. U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders (read: Stocks Log Best Week of the Year: Winning ETFs).
Additionally, a big downward revision in U.S. payrolls for the 12-month period through March 2024 supports the rate cut bets. The Bureau of Labor Statistics’ preliminary annual benchmark review of employment data showed that the U.S. economy created 818,000 fewer jobs last year than originally reported. It marks the largest downward revision since 2009 and shows that the labor market wasn’t quite as red-hot as initially thought.
Market participants are now pricing in a 100% chance of a rate cut next month, according to CME Group’s FedWatch tool. 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.
Rate Cuts: A Boon
High-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries of a rate cut, 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.
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 (read: Rate Cut in the Cards? ETFs to Play).
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.
ETFs Scaling New Highs
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 155 stocks in its basket, with none accounting for more than 13.4% 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 $35.4 billion and an average daily volume of around 3.5 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. Utilities ETF (IDU - Free Report)
iShares U.S. Utilities ETF tracks the Russell 1000 Utilities RIC 22.5/45 Capped Index. It holds a basket of 44 securities with a slight tilt toward the top firm at 12.2%, while others make up for less than 7.2%. Here again, electric utilities dominate the portfolio at 57.6%, followed by multi utilities (22.5%).
iShares U.S. Utilities ETF has amassed $1.4 billion in its asset base while trading in a good volume of 158,000 shares a day on average. The fund charges 40 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: How AI Power Demand is Boosting Utility ETFs).
iShares U.S. Consumer Focused ETF (IEDI)
iShares U.S. Consumer Focused ETF is an actively managed ETF providing exposure to U.S. companies with a focus on U.S. consumer spending and consumer goods. It holds 201 stocks in its basket, with key holdings in consumer discretionary, consumer staples distribution & retail, and consumer services.
iShares U.S. Consumer Focused ETF has accumulated $22.2 million in its asset base and charges 18 bps in fees per year. Volume is paltry for IEDI as it exchanges 3,000 shares a day, on average.
Global X Gold Explorers ETF (GOEX - Free Report)
Global X Gold Explorers ETF provides exposure to companies involved in the exploration of gold deposits and tracks the Solactive Global Gold Explorers & Developers Total Return Index. It is home to 50 stocks. Canadian firms dominate the fund’s return at 50.4%, followed by Australia (26.6%) and the United States (9.9%).
Global X Gold Explorers ETF is unpopular and illiquid, with AUM of $41.8 million and an average daily volume of 3,000 shares. The expense ratio comes in at 0.65%.
Invesco DWA Technology Momentum ETF (PTF - Free Report)
Invesco DWA Technology Momentum ETF offers exposure to 35 tech companies that are showing relative strength (momentum) by tracking the Dorsey Wright Technology Technical Leaders Index. Semiconductor & Equipment takes the largest share at 37.7%, followed by software (30.4%) and diversified telecom services (11.3%) (read: 5 Technology ETFs at the Forefront of the August Rebound).
Invesco DWA Technology Momentum ETF is relatively illiquid and unpopular, with AUM of $460.2 million. It charges 60 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.