ETFs
Sector ETFs to benefit from rising bets on rate cuts – June 7, 2024
Bets on a rate cut have intensified again following the latest data releases, which signal a slowdown in the world’s largest economy. Traders now see a nearly 69% chance of a rate cut in September, according to the CME’s FedWatch tool, up from about 50% last week.
U.S. manufacturing activity slowed for the second straight month in May, and U.S. construction spending unexpectedly fell for the second straight month in April due to declines in nonresidential activity. The latest PCE inflation data revealed that US inflation stabilized in April, suggesting that the US central bank’s interest rate cut plans later this year remained intact.
Additionally, the Bank of Canada’s decision to lower its benchmark rate for the first time in four years and the European Central Bank’s decision to cut rates for the first time since 2019 also fueled optimism about a more flexible monetary policy.
A boon for the sectors
Lower interest rates generally lead to lower borrowing costs, making it easier for businesses to expand their businesses, leading to increased profitability. This in turn stimulates economic growth and thus boosts the stock market.
In particular, high-dividend sectors, such as utilities and real estate, will be the biggest beneficiaries of rate cuts, given their sensitivity to interest rates. This is especially true since these securities offer higher yields due to their outsized returns. In real estate, lower rates can stimulate housing market activity by making mortgages more affordable. Additionally, securities in capital-intensive sectors like telecommunications will also benefit from lower rates. Businesses will also face lower loan rates over time (read: Tap into the power of utilities and small caps with these ETFs).
Additionally, the rate cut will also have a positive impact on consumer discretionary and financial services. For consumer discretionary sectors, reduced borrowing costs may lead to increased consumer spending. In the financial sector, while lower rates can squeeze banks’ net interest margins, they can also encourage lending and potentially lead to increased lending activity to individuals and businesses.
Additionally, Fed rate cuts tend to stimulate foreign capital inflows to emerging markets like India. As the outlook for the Indian economy remains strong, the rate cuts will boost foreign capital inflows, which could drive the market to new highs. Gold, which has gained momentum recently due to safe-haven demand amid heightened geopolitical tensions, will also continue to shine as lower interest rates would increase the metal’s appeal.
With this in mind, we have highlighted sector ETFs that are expected to explode with lower rates.
ETF to win
Vanguard Real Estate ETF (VNQ – Free report)
Vanguard Real Estate ETF targets the real estate segment of the broader U.S. market. It tracks the MSCI US Investable Market Real Estate 25/50 Index and holds 158 stocks in its basket, with no one accounting for more than 13% of the shares. VNQ holds key holdings in retail REITs, telecom tower REITs and industrial REITs each with double-digit exposure.
The Vanguard Real Estate ETF is the most popular and liquid ETF, with $31.8 billion in assets under management and an average daily volume of approximately 4 million shares per day. It charges 13 basis points in fees per year to investors and has a Zacks ETF Rank #3 (Hold) with a Medium Risk Outlook.
iShares US Home Construction ETF (ITB – Free report)
The iShares US Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones US Select Home Construction Index.
With $2.7 billion in assets under management, the iShares US Home Construction ETF holds a basket of 44 stocks, with a heavy focus on the top two companies. The product charges 40 basis points in annual fees and trades a large volume of around 2 million shares per day on average. The iShares US Home Construction ETF has a Zacks ETF Rank #3 with a High Risk Outlook (read: ETFs to Play as Mortgage Rates Set to Fall).
Consumer Discretionary Select Sector SPDR Fund (XLY – Free report)
The SPDR Consumer Discretionary Select Sector fund provides exposure to the broad consumer discretionary sector and tracks the Consumer Discretionary Select Sector Index. It holds 52 stocks in its basket, with key holdings in general retail, hotels, restaurants and leisure, specialty retail and automobiles each with a double-digit allocation.
The SPDR Consumer Discretionary Fund is the largest and most popular product in this space, with $18.5 billion in assets under management and an average daily volume of approximately 4 million shares. It charges 9 basis points in annual fees and has a Zacks ETF Rank #3 with a Medium Risk Outlook (read: 5 Top-Ranked ETFs to Buy for a Turnaround).
SPDR Gold Trust ETF (GLD – Free report)
The SPDR Gold Trust ETF tracks the price of gold bullion measured in US dollars and held in London under the custody of HSBC Bank USA. This is an ultra-popular gold ETF with $62.5 billion in assets under management and heavy volume of around 9 million shares per day. The SPDR Gold Trust ETF charges 40 basis points in fees per year to investors and has a Zacks ETF Rank #3.
iShares MSCI India ETF (INDIA – Free report)
The iShares MSCI India ETF provides exposure to large and mid-cap stocks in India by tracking the MSCI India Index and charging 65 basis points in fees per year to investors. Holding 146 stocks in its basket, the fund has key exposure to the financials, consumer discretionary, information technology and energy sectors.
The iShares MSCI India ETF is the largest and most popular ETF in this space, with $10.3 billion in assets under management and an average trading volume of 4.4 million shares per day. It has a Zacks ETF Rank #3 with a Medium Risk Outlook (read: Indian ETFs to Soar Following Modi’s Likely Victory).
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