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Expectations of Fed rate cuts have been rising lately due to continued signs of cooling inflation. The Consumer Price Index rose 2.5% year over year in August, down from the rise of 2.9% in July. This is the fifth straight annual drop and marks the slowest pace of annual growth since February 2021 (read: Here's Why Treasury ETFs Are Scaling New Highs).
There is more to the story. The bouts of recent downbeat data suggest that the U.S. economy is slowing down, leading investors to seek refuge in Treasury securities, perceived as safe-haven assets. The United States created 142,000 jobs in August, lower than the 160,000 anticipated by economists. Prior month job growth was also revised lower, indicating signs of continued cooling in the labor market.
U.S. manufacturing sector activity has also been slowing. This has strengthened the bet for a Fed rate cut this month. Following the latest CPI report, investors’ bets for a 25-bps rate cut rose to 85% from 66% a prior day, as measured by the CME Fed Watch Tool. Against this backdrop, below, we have highlighted a few winning exchange-traded fund (ETF) strategies that could prove to be beneficial for your portfolio.
Tap Bond ETFs
Bond yields are directly proportional to interest rates. Hence, if there is a rate cut, bond prices would go up as bond prices and yields are inversely related. This is why, U.S. treasury ETFs have been hitting highs lately (read: Here's Why Treasury ETFs Are Scaling New Highs).
Some winning U.S. treasury ETFs are iShares U.S. Treasury Bond ETF (GOVT - Free Report) , iShares 20+ Year Treasury Bond ETF (TLT - Free Report) , iShares 10-20 Year Treasury Bond ETF (TLH - Free Report) , iShares 7-10 Year Treasury Bond ETF (IEF) and Schwab Short-Term U.S. Treasury ETF (SCHO).
Tap High-Dividend ETFs
High-dividend ETFs are always a good source of regular current income. Investors thus may be interested in equities that have the potential to offer capital appreciation as well as benchmark-beating yields. After all, dividends are one of the ways to ride out the turbulent times.
ETFs like Global X SuperDividend ETF (SDIV - Free Report) , SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) and Vanguard High Dividend Yield ETF (VYM - Free Report) are some of the ETFs that offer high dividend yields. The fund SDIV yields 10.94% annually. SPYD yields 4.10% annually, while VYM yields 2.87% annually.
Tap Rate-Sensitive Sector ETFs
Sectors like real estate and utilities are rate-sensitive in nature. These sectors fare better in a low-rate environment. With the Fed likely to cut rates in September, the real estate sector should outperform. Vanguard Real Estate ETF (VNQ - Free Report) yields 3.66% annually and charges 13 bps in fees. Meanwhile, the Utility sector tends to be stable and provides consistent dividends. Utilities Select Sector SPDR ETF (XLU - Free Report) yields 2.84% annually.
Tap Growth ETFs
Growth investing focuses on capital appreciation rather than annual income or dividends.Growth stocks typically have high future earnings potential, meaning much of their value is based on expectations of future cash flows (read: 5 Growth ETFs to Buy as Inflation Drops to a 3-Year Low).
When interest rates are low, the discount rate used to value these future cash flows decreases, making the present value of those future earnings higher. This boosts the stock price. Plus, cheaper borrowing costs help growth companies to fund their ambitious projects. The SPDR Portfolio S&P 500 Growth ETFSPYG is an example of growth ETF.
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ETF Strategies to Follow Amid Likely Fed Rate Cut
Expectations of Fed rate cuts have been rising lately due to continued signs of cooling inflation. The Consumer Price Index rose 2.5% year over year in August, down from the rise of 2.9% in July. This is the fifth straight annual drop and marks the slowest pace of annual growth since February 2021 (read: Here's Why Treasury ETFs Are Scaling New Highs).
There is more to the story. The bouts of recent downbeat data suggest that the U.S. economy is slowing down, leading investors to seek refuge in Treasury securities, perceived as safe-haven assets. The United States created 142,000 jobs in August, lower than the 160,000 anticipated by economists. Prior month job growth was also revised lower, indicating signs of continued cooling in the labor market.
U.S. manufacturing sector activity has also been slowing. This has strengthened the bet for a Fed rate cut this month. Following the latest CPI report, investors’ bets for a 25-bps rate cut rose to 85% from 66% a prior day, as measured by the CME Fed Watch Tool. Against this backdrop, below, we have highlighted a few winning exchange-traded fund (ETF) strategies that could prove to be beneficial for your portfolio.
Tap Bond ETFs
Bond yields are directly proportional to interest rates. Hence, if there is a rate cut, bond prices would go up as bond prices and yields are inversely related. This is why, U.S. treasury ETFs have been hitting highs lately (read: Here's Why Treasury ETFs Are Scaling New Highs).
Some winning U.S. treasury ETFs are iShares U.S. Treasury Bond ETF (GOVT - Free Report) , iShares 20+ Year Treasury Bond ETF (TLT - Free Report) , iShares 10-20 Year Treasury Bond ETF (TLH - Free Report) , iShares 7-10 Year Treasury Bond ETF (IEF) and Schwab Short-Term U.S. Treasury ETF (SCHO).
Tap High-Dividend ETFs
High-dividend ETFs are always a good source of regular current income. Investors thus may be interested in equities that have the potential to offer capital appreciation as well as benchmark-beating yields. After all, dividends are one of the ways to ride out the turbulent times.
ETFs like Global X SuperDividend ETF (SDIV - Free Report) , SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) and Vanguard High Dividend Yield ETF (VYM - Free Report) are some of the ETFs that offer high dividend yields. The fund SDIV yields 10.94% annually. SPYD yields 4.10% annually, while VYM yields 2.87% annually.
Tap Rate-Sensitive Sector ETFs
Sectors like real estate and utilities are rate-sensitive in nature. These sectors fare better in a low-rate environment. With the Fed likely to cut rates in September, the real estate sector should outperform. Vanguard Real Estate ETF (VNQ - Free Report) yields 3.66% annually and charges 13 bps in fees. Meanwhile, the Utility sector tends to be stable and provides consistent dividends. Utilities Select Sector SPDR ETF (XLU - Free Report) yields 2.84% annually.
Tap Growth ETFs
Growth investing focuses on capital appreciation rather than annual income or dividends.Growth stocks typically have high future earnings potential, meaning much of their value is based on expectations of future cash flows (read: 5 Growth ETFs to Buy as Inflation Drops to a 3-Year Low).
When interest rates are low, the discount rate used to value these future cash flows decreases, making the present value of those future earnings higher. This boosts the stock price. Plus, cheaper borrowing costs help growth companies to fund their ambitious projects. The SPDR Portfolio S&P 500 Growth ETF SPYG is an example of growth ETF.