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Forget Growth or Value: Try Blend ETFs as Fed in no 'Hurry' to Cut Rates
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Federal Reserve Chair Jerome Powell has lately indicated that the U.S. central bank's cautious approach to reducing interest rates, with a preference for smaller, gradual cuts.A series of key employment reports may, however, change the Fed's strategy. Powell reiterated earlier this week that the Fed's rate-setting committee expects to continue reducing rates at a measured pace.
If there are signs of a weakening job market and the economy slows more than expected, the Fed is ready to make deeper rate cuts, following an initial half-percentage point reduction last month. While policymakers expect 25 basis point cuts in November and December, new developments could lead to more aggressive action.
Job Market in "Good Shape," but Slowing
Richmond Fed President Tom Barkin stated on Wednesday that the job market remains in relatively strong condition, citing an average of 116,000 jobs added per month over the last three months. However, he admitted that hiring rates have declined to 2013 levels.
Job gains are being revised downward, particularly in sectors like healthcare. Barkin also noted that while employers are not hiring much, the layoff rate is near a 25-year low and initial claims for unemployment benefits remaining muted.
What Do Experts Think?
Senior economists like Lydia Boussour of EY and Neil Dutta from Renaissance Macro Research suggest that ongoing strikes and hurricane damage may prompt larger cuts in November and December, as quoted on Yahoo Finance.
Dutta argued that while these disruptions may be short-term, the Fed should not ignore them, especially given the risks of reigniting inflation. But then, it is also to be seen if the Fed reacts to the short-term upheavals that could smoothen out automatically.
What Kind of ETFs Should You Invest In?
Low rates normally bode well for growth investing. Growth stocks often outperform value stocks in a low-rate environment. Value stocks are typically more dependent on current earnings and dividends. On the other hand, growth stocks are valued based on their future cash flows.
When interest rates are low, the discount rate used to value these future cash flows decreases.This means that the present value of future earnings is higher, which can drive up the price of growth stocks. With the interest rate cut scenario looking dicey at the current level, one may find it difficult to bet on either growth or value stocks.
Blended ETFs (Exchange-Traded Funds) could be better options. Blend ETFs combine both growth and value investing strategies, providing a balanced portfolio by including both growth and value stocks. They aim to offer a more diversified exposure to the market.
Image: Bigstock
Forget Growth or Value: Try Blend ETFs as Fed in no 'Hurry' to Cut Rates
Federal Reserve Chair Jerome Powell has lately indicated that the U.S. central bank's cautious approach to reducing interest rates, with a preference for smaller, gradual cuts.A series of key employment reports may, however, change the Fed's strategy. Powell reiterated earlier this week that the Fed's rate-setting committee expects to continue reducing rates at a measured pace.
If there are signs of a weakening job market and the economy slows more than expected, the Fed is ready to make deeper rate cuts, following an initial half-percentage point reduction last month. While policymakers expect 25 basis point cuts in November and December, new developments could lead to more aggressive action.
Job Market in "Good Shape," but Slowing
Richmond Fed President Tom Barkin stated on Wednesday that the job market remains in relatively strong condition, citing an average of 116,000 jobs added per month over the last three months. However, he admitted that hiring rates have declined to 2013 levels.
Job gains are being revised downward, particularly in sectors like healthcare. Barkin also noted that while employers are not hiring much, the layoff rate is near a 25-year low and initial claims for unemployment benefits remaining muted.
What Do Experts Think?
Senior economists like Lydia Boussour of EY and Neil Dutta from Renaissance Macro Research suggest that ongoing strikes and hurricane damage may prompt larger cuts in November and December, as quoted on Yahoo Finance.
Dutta argued that while these disruptions may be short-term, the Fed should not ignore them, especially given the risks of reigniting inflation. But then, it is also to be seen if the Fed reacts to the short-term upheavals that could smoothen out automatically.
What Kind of ETFs Should You Invest In?
Low rates normally bode well for growth investing. Growth stocks often outperform value stocks in a low-rate environment. Value stocks are typically more dependent on current earnings and dividends. On the other hand, growth stocks are valued based on their future cash flows.
When interest rates are low, the discount rate used to value these future cash flows decreases.This means that the present value of future earnings is higher, which can drive up the price of growth stocks. With the interest rate cut scenario looking dicey at the current level, one may find it difficult to bet on either growth or value stocks.
Blended ETFs (Exchange-Traded Funds) could be better options. Blend ETFs combine both growth and value investing strategies, providing a balanced portfolio by including both growth and value stocks. They aim to offer a more diversified exposure to the market.
Blend ETFs in Focus
Some notable blend ETFs include the likes of SPDR S&P 500 ETF Trust (SPY - Free Report) , Vanguard Total Stock Market ETF (VTI - Free Report) , Vanguard Dividend Appreciation ETF (VIG - Free Report) , Vanguard Mid-Cap ETF (VO - Free Report) , Invesco S&P 500 Equal Weight ETF (RSP - Free Report) (see all large-cap blend ETFs from here).