Best Funds for 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 that will 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 when rates fall?

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

In general, falling interest rates are beneficial for assets that generate cash flows, especially if those flows are fixed. The following assets tend to perform well when rates fall:

• Obligations : Bond prices move for many reasonsBut one of the most important factors is the evolution of current interest rates. The longer the maturity of the bond, the more it is affected by the evolution of rates. Long-term bonds are therefore those that 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 Stocks typically pay a quarterly dividend, which can increase over time. These types of stocks tend to perform relatively better than the average stock when rates fall, partly because the payout becomes more attractive.

• Real Estate Investment Trusts (REITs): FPI Investing in real estate, and lower interest rates drive up real estate prices, 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. Falling rates can occur at the beginning of a recession, when many asset prices are falling rapidly. So buying the above assets does not guarantee that you will be fully protected against a recession. But these investments can help soften the blow.

That said, lower rates should help support bond, preferred stock and real estate investment trust prices in most scenarios, barring widespread panic. But lower rates may only cushion the dividend stock crisis, which can fall with other actions during times of economic slowdown or recession.

However, if investors view low rates as part of a “soft landing” — where the economy slows but doesn’t fall into recession — the broader stock market could also recover with lower rates.

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

The 7 Best ETFs to Use When the Fed Cuts Rates

Here are some of the top fund candidates based on their holdings, returns, and expense ratio.

iShares 20+ Year Treasury Bond ETF (TLT)

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

Why it can perform: If you think rates are going to go down, this fund will probably go up. But if rates go up again, this fund will probably go down from there.

Expense ratio: 0.15 percent

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

This fund also holds U.S. Treasuries, 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 yield on this fund will decline as rates fall, but you’re not risking much capital to get it. Rates remain ‘higher for longer’ As the Fed says, you’ll keep getting that yield. The fund also offers options, meaning if yields get too low, you can take your capital and invest in something more interesting later, probably stocks.

Expense ratio: 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 it can perform: This ETF should do well when rates fall, partly because of the quality of the companies in the portfolio, but also because of the high current yield and an extremely low expense ratio. Of course, even if rates don’t fall, you’re still getting a high yield.

Expense ratio: 0.04 percent

Global X US Preferred ETF (PFFD)

This ETF invests primarily in preferred stocks of banks and utilities, offering a healthy yield. 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 bonds should rise, taking the value of this fund with it. Of course, if rates rise, the fund is likely to fall, but you will continue to enjoy a high yield.

Expense ratio: 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 perform: 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: Lower rates could make dividend-paying stocks more attractive as income sources, helping them outperform non-paying stocks. However, common stocks tend to be sensitive, so a broader decline could push this fund and others lower despite the solid performance.

Expense ratio: 0.06 percent

Vanguard Real Estate ETF (VNQ)

This Vanguard fund holds REITs, a type of company that is heavily dependent on interest rates. In exchange for being exempt from corporate taxes, REIT stocks pay healthy 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

In conclusion

ETFs can be a great way to invest in a trend like 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 it with powerful search tools.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. Furthermore, investors are advised that past performance of investment products is no guarantee of future price appreciation.

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