ETFs
ETFs set to drive gains amid rising rate cut expectations
Recent ADP data and jobless claims support the “soft economy” scenario, which reinforces market expectations for a Fed rate cut as early as September of this year. According to CME FedWatch, the market is pricing in a 68.1% probability of a rate cut to 5-5.25%.
Investors are anticipating a rate cut in December, with a 46.3% probability that interest rates will fall to 4.75-5%.
More information about the data
The unemployment rate held steady at 4% in June as U.S. job growth picked up a healthy pace, according to Reuters, indicating the Fed may be able to control persistent inflation levels without increasing the possibility of a recession.
The Labor Department’s employment report is expected to show that the rate of annual wage growth slowed to a three-year low, confirming the disinflationary trend after unfavorable inflation data in the first quarter of 2024. This may help increase policymakers’ confidence that interest rate cutting will begin this year.
However, even as market expectations for an interest rate cut from September increase, it is important to note that the Fed will maintain a cautious approach throughout the period to avoid being too aggressive.
ETFs to consider
Below, we highlight a few areas of ETFs that could see performance improve in the near term, given the increasing likelihood of a Fed rate cut.
Currency ETFs
The value of the greenback tends to move in the opposite direction of interest rate adjustments by the Fed. Along with the trend toward “de-dollarization,” the increasing likelihood of a Fed rate cut this year is making the dollar less attractive to foreign investors, leading to lower demand for the currency.
Investing in funds that offer currency exposure to the greenback becomes an attractive investment option in such a context. Investors may consider Invesco DB US Dollar Index Bear Fund UDN, a suitable option for investors with a bearish outlook on the US dollar.
Investors can also look to funds like Invesco CurrencyShares Euro Currency Trust Fund FXE, Invesco CurrencyShares Swiss Franc Trust Fund FXF and Invesco CurrencyShares Sterling Trust Fund FXB.
Investing in digital currencies is also worth considering, given the possibility of a weakening greenback. IShares Bitcoin Trust Registered I BITE, Bitcoin Trust in Grayscale GBTC and Bitwise Bitcoin Exchange Traded Fund (ETF) BITB can be considered.
Emerging Markets ETFs
The value of the greenback tends to move in the opposite direction of interest rate adjustments by the Fed. As the prospect of Fed rate cuts increases, the dollar loses its appeal to foreign investors, reducing demand for it. Emerging markets tend to do well when the U.S. dollar weakens.
The story continues
The increasing likelihood of a Fed rate cut will also benefit emerging markets that rely heavily on exports, leading to increased trade with the United States.
Investors may consider funds as iShares Core MSCI Emerging Markets Exchange Traded Fund IEMG, Vanguard FTSE Emerging Markets Exchange Traded Fund VWO, iShares MSCI Emerging Markets Exchange Traded Fund EEM and SPDR Portfolio ETF Emerging Markets SPEM.
Gold ETF
The price of gold is inversely proportional to the value of the US dollar, as gold is priced in dollars. A weaker US dollar generally leads to increased demand for gold, pushing its price up as it becomes more affordable for buyers holding other currencies. With higher rate cuts projected later in 2024, investing in gold becomes more attractive.
As the US dollar weakens towards the end of 2024 and into 2025, the price of the yellow commodity could rise further. SPDR Gold Shares GLD, iShares Gold Trust Fund UAI, ABRDN Physical Gold Stock ETF SGOLand Goldman Sachs ETF on physical gold AAAU may be considered.
Real Estate ETFs
As expectations of interest rate cuts mount toward the end of the year, 2024 appears poised to bring relief to the housing market. A cut in the federal funds rate typically has an indirect impact on the mortgage rate. Industry experts are optimistic that mortgage rates will trend favorably throughout the year.
Funds like iShares U.S. Residential Construction Exchange Traded Fund ITB, SPDR S&P Home Builders Exchange Traded Fund XHB, Invesco Building and construction ETF PKB and Hoya Capital Housing Exchange Traded Fund (ETF) HOMZ can be considered.
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SPDR Gold Shares (GLD): ETF Research Reports
iShares Gold Trust (IAU): ETF Research Reports
abrdn Physical Gold Stock ETF (SGOL): ETF Research Reports
Invesco CurrencyShares British Pound Sterling Trust (FXB): ETF Research Reports
Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports
iShares MSCI Emerging Markets (EEM) ETF: ETF Research Reports
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
iShares US Home Construction ETF (ITB): ETF Research Reports
Invesco Building & Construction ETF (PKB): ETF Research Reports
Invesco DB US Dollar Index Bearish ETF (UDN): ETF Research Reports
iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports
Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports
Invesco CurrencyShares Swiss Franc Trust (FXF): ETF Research Reports
Grayscale Bitcoin Trust ETF (GBTC): ETF Research Reports
SPDR Portfolio Emerging Markets ETF (SPEM): ETF Research Reports
Goldman Sachs Physical Gold ETF (AAAU): ETF Research Reports
Hoya Capital Housing ETF (HOMZ): ETF Research Reports
iShares Bitcoin Trust (IBIT): ETF Research Reports
Bitwise Bitcoin ETF (BITB): ETF Research Reports