ETFs Expected to Soar if Fed Cuts Rates: GLD, ITB, XLY, VNQ, INDA
In its latest meeting, Fed Chair Jerome Powell maintained interest rates steady in the range of 5.25%-5.50% and signaled three rate cuts this year, citing expanding economic activity and easing but elevated inflation. Following the meeting, futures markets priced in a nearly 75% probability that the first cut would come in the Jun 11-12 meeting, according to CME Group’s FedWatch gauge.
Against such a backdrop, some ETFs are expected to soar if the Fed cuts the rate. These are SPDR Gold Trust ETF GLD, iShares U.S. Home Construction ETF ITB, Consumer Discretionary Select Sector SPDR Fund XLY, Vanguard Real Estate ETF VNQ, and iShares MSCI India ETF INDA.
“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated,” the Fed said in a statement.
This shift in its monetary policy approach aims to support a stable economic environment without triggering a recession or a significant rise in unemployment. Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations more easily, resulting in increased profitability. This, in turn, stimulates economic growth and thus provides a boost to the stock market.
Further, lower rates can positively impact sectors like real estate, consumer discretionary, and financial services, which are typically sensitive to interest rate changes. In real estate, for instance, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can compress net interest margins for banks, they can also encourage lending and potentially lead to increased consumer and business loan activity.
Moreover, Fed rate cuts tend to boost foreign capital inflows into emerging markets like India. As the outlook for India’s economy remains strong, rate cuts will boost foreign capital inflow, which can lead the market to new highs. Gold, which has gained momentum lately on safe-haven demand due to increased geopolitical tension, will also continue to shine as lower interest rates would increase the metal’s attractiveness.
Policymakers signaled they remain on track to cut rates for the first time since March 2020. However, they now see just three reductions in 2025, down from four forecast in December, based on the median projection.
ETFs in Focus
SPDR Gold Trust ETF (GLD)
SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with AUM of $57.9 billion and a heavy volume of about 6.4 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold).
iShares U.S. Home Construction ETF (ITB)
iShares U.S. Home Construction ETF provides exposure to the U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index.
With an AUM of $3.1 billion, iShares U.S. Home Construction ETF holds a basket of 47 stocks, with a heavy concentration on the top two firms. The product charges 40 bps in annual fees and trades in a heavy volume of around 2 million shares a day, on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3 with a High risk outlook.
Consumer Discretionary Select Sector SPDR Fund (XLY)
Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 53 securities in its basket, with key holdings in specialty retail, broadline retail, hotels, restaurants and leisure, and automobiles with a double-digit allocation each.
Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with AUM of $19.4 billion and an average daily volume of around 5 million shares. Its expense ratio is 0.09% and it has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Vanguard Real Estate ETF (VNQ)
Vanguard Real Estate ETF targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 159 stocks in its basket, with none accounting for more than 8% share. VNQ has key holdings in industrial REITs, retail REITs, and telecom tower REITs with double-digit exposure each.
Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $33.4 billion and average daily volume of around 5 million shares a day. It charges 12 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.
iShares MSCI India ETF (INDA)
iShares MSCI India ETF offers exposure to large and mid-cap companies in India by tracking the MSCI India Index and charging 65 bps in fees per year from investors. Holding 136 stocks in its basket, the fund has key exposure in financials, information technology, consumer discretionary, and energy.
iShares MSCI India ETF is the largest and the most popular ETF in this space, with AUM of $9 billion and an average trading volume of 4.3 million shares a day. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Overall, with the Fed signaling rate cuts and the potential impact on various sectors and ETFs, investors should keep a close eye on these developments and consider adjusting their portfolios accordingly to capitalize on potential opportunities.