Best ETFs for Interest Rate Cuts: The Best Funds to Use When the Fed Cuts Rates

With the Federal Reserve announcing plans to cut interest rates once inflation has slowed sufficiently, investors have been looking for investments to perform well in this climate. exchange-traded funds (ETFs) Investors respond well to lower interest rates, and income investors may find that lower interest rates make this a particularly attractive time to invest in the market.

Here are some ETFs that could respond favorably to lower interest rates and what you need to know.

Which investments perform well with falling rates?

The performance of an ETF depends on its investment type. A fund that holds well-performing stocks will see its value rise, while a fund whose stocks are performing well will see its value fall. So, to understand which funds perform well when rates fall, you need to understand which assets perform when rates fall.

In general, falling rates tend to be beneficial for assets that generate cash flow, especially if that payment is fixed. The following assets tend to perform well when rates fall:

• Obligations : Bond prices move for many reasonsbut one of the most important concerns the evolution of current interest rates. And the longer the maturity of the bond, the more it is affected by the evolution of rates. Thus, long-term bonds evolve the most when rates fall.
• Preferred shares: Similar to bonds, preferred shares Bonds typically offer a fixed return and can be called. They also tend to fluctuate with changes in prevailing interest rates.
• Dividend stocks: Dividend stocks typically pay a quarterly dividend, which can increase over time. This type of stock tends to perform relatively better than the average stock when rates fall, in part because the payout becomes more attractive.
• Real Estate Investment Trusts (REITs): REIT Investing in real estate, and falling interest rates cause real estate prices to rise, all else being equal. REITs also pay large dividends, so lower rates make those dividends more attractive as well. Additionally, REITs also benefit because lower rates allow them to borrow money more cheaply, which they must do to operate.

It is important to understand that the relationship between falling interest rates and rising asset prices is not one-to-one. A rate cut can occur at the start of a recession, when the prices of many assets are falling rapidly. So, buying the above assets does not guarantee that you are fully protected against a recession. But these investments could help soften the shock.

That said, lower rates should help support the prices of bonds, preferred stocks and real estate investment trusts in most scenarios, barring widespread panic. But the rate cut could only cushion the crisis in dividend stocks, which can fall with other actions in times of economic slowdown or recession.

However, if investors view low rates as part of a “soft landing” – where the economy slows but does not fall into recession – the stock market as a whole could also recover with lower rates.

Investors have already priced these scenarios into stocks and bonds since it became clear in the second half of 2023 that The Fed’s next move would likely be a rate cut. So the prices of some assets, such as bonds and preferred stocks, have already recovered significantly.

7 Best ETFs When the Fed Cuts Rates

Here are some of the best candidate funds based on their holdings, returns and spending rate.

iShares 20+ Year Treasury Bond ETF (TLT)

This fund exclusively holds long-term bonds. US Treasury Bondswith maturities of 20 to 30 years, this fund will therefore be quite responsive to changes in rates.

Why this can work well: If you think rates are going down, this fund will likely go up. But if rates bounce back up again, this fund will likely go down from here on out.

Expense ratio: 0.15 percent

Goldman Sachs Access Treasury 0-1 Year ETF (GBIL)

This fund also holds U.S. Treasury bonds, but in this case, these are debts with maturities of less than one year. This is one of the best ways to get the best returns given current interest rates.

Why it can perform: Yes, the return on this fund will decrease as rates fall, but you’re not taking on a lot of capital risk to get it. Rates remain ‘higher for longer’ as the Fed says, you will continue to get that yield. The fund also offers an option, meaning that if returns get too low, you can take your capital and invest in something else that will be more attractive later, probably stocks.

Expense rate: 0.12 percent

iShares 10+ Year Investment Grade Corporate Bond ETF (IGLB)

This fund holds long-term corporate bonds, which means it typically offers a higher yield than similar Treasury bonds. The securities held are investment grade, which means they are of high quality.

Why this can work well: This ETF should do well when rates fall, particularly due to the high quality companies in the portfolio, but also the strong current yield and a very thin expense ratio. Of course, even if rates don’t fall, you get a solid return.

Expense ratio: 0.04 percent

Global X American Preferred ETF (PFFD)

This ETF invests primarily in preferred stocks of banks and utilities, providing a healthy return. It charges a very reasonable expense ratio and pays this dividend monthlyAlso.

Why it can perform: If prevailing interest rates fall, the price of preferred stock is expected to increase, taking with it the value of this fund. Of course, if rates rise, the fund is likely to decline, but you’ll still get that high return.

Expense rate: 0.23 percent

Virtus Infracap REIT Preferred ETF (PFFR)

This fund also invests in preferred stocks, but it offers a higher dividend than the fund above because it holds higher-yielding securities issued by real estate investment trusts (REITs).

Why it can be efficient: Preferred stocks issued by REITs typically have higher yields than those issued by banks and utilities, but they also carry higher risks. This fund will likely rise if the Fed cuts interest rates, but it could fall if rates rise. You’ll have to judge whether the extra-large monthly dividend is worth the extra risk, compared with the Global X fund and others.

Expense ratio: 0.45 percent

Vanguard High Dividend Yield ETF (VYM)

This fund holds high-yielding common stocks of dividend-paying companies, some of which are among the The Dividend Aristocratsa group of stocks with a long history of rising payments.

Why it can perform: Declining rates can make dividend-paying stocks more attractive as sources of income, helping them outperform non-dividend-paying stocks. However, common stocks tend to be sensitive, so a broader decline could drag down this and other funds despite the strong performance.

Expense rate: 0.06 percent

Vanguard Real Estate ETF (VNQ)

This Vanguard fund owns REITs, a type of company that is heavily dependent on interest rates. In exchange for not paying corporate taxes, REIT stocks pay large dividends.

Why it can perform: REIT dividends will be more attractive as rates fall, and lower rates will also allow REITs to finance their operations more cheaply while increasing the value of their assets. Of course, higher rates will have the opposite effect for REITs.

Expense ratio: 0.13 percent

Conclusion

ETFs can be a great way to invest in a trend such as falling interest rates, allowing investors to quickly move into a diversified position without having to analyze each holding. best brokers for stock trading can help you sort through powerful search tools.

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