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4 Sector ETFs to Benefit From 3-Year Lower Rates

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In the FOMC meeting concluded on Sep 17, the Federal Reserve Chair Jerome Powell maintained a dovish stance for a longer period. It kept U.S. interest rates near zero and pledged to keep rates at lower levels until the end of 2023.

The central bank will not increase rates until labor market conditions return to “maximum employment,” and inflation rises to 2% and “is on track to moderately exceed 2% for some time.” As such, it will continue to purchase at least $80 billion a month in U.S. Treasuries and $40 billion a month in mortgage-backed securities to make market movements smooth and “foster accommodative financial conditions.”

Though the U.S. economy has bounced back faster than expected, the central bank warned that its full recovery is still far away and that it will continue to face risks due to the ongoing pandemic (read: ETFs in Focus on Tug of War Between Bulls and Bears).

Lower Rates: A Boon

Low rates are a boon for high-yield sectors such as utilities and real estate as well as the dividend-paying securities. When interest rates remain low, these sectors, which are generally known for the income they generate, gain momentum. Utilities offer solid dividend payouts and excellent capital appreciation over the longer term while real estate is required to distribute at least 90% of taxable income to its shareholders annually in the form of dividends.

Homebuilders will also get a boost as low rates will encourage people to buy more homes and make refinance cheaper. Overall, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and a rise in economic activities. This will, in turn, increase profitability across various segments.

Meanwhile, gold mining stocks will also get a boost, given that these are leveraged plays on the underlying metal. Lower rates will continue to weigh on the dollar against the basket of currencies, raising the metal’s attractiveness as it does not pay interest like fixed-income assets.

In such a scenario, investors could make a play on these sectors which should continue to trade smoothly in the wake of expected three years low rates. Below we have highlighted some ETFs and stocks that could be excellent plays for investors.

Vanguard Real Estate ETF (VNQ - Free Report)

This fund follows the MSCI US Investable Market Real Estate 25/50 Index and holds 181 stocks in its basket. Specialized REITs take the largest share at 41.5% while residential REITs and industrial REITs round off the top three with double-digit exposure each. Expense ratio comes in at 0.12%. VNQ is the most-popular and liquid ETFs with AUM of $29.8 billion and average daily volume of around 4 million shares a day. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Here's Why REIT ETFs are Sizzling With Opportunities).

Utilities Select Sector SPDR (XLU - Free Report)

With AUM of $11.9 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities takes the top spot in terms of sectors at 62%, closely followed by multi utilities (32.1%). The product charges 13 bps in annual fees and sees heavy volume of around 13.7 million shares on average. XLU has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB - Free Report)

This ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks with homebuilding taking the top spot at 65.8%, followed by 14.1% in building products and 9.8% in home improvement retail. The product has amassed $2.3 billion in its asset base and trades in heavy volume of around 3 million shares a day on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook (read: Top-Ranked Sector ETFs & Stocks to Buy for September).

VanEck Vectors Gold Miners ETF (GDX - Free Report)

This is the most-popular and actively traded gold miner ETF with AUM of $18.5 billion and an average daily volume of around 29.2 million shares. The fund offers exposure to companies involved in the gold mining industry and follows the NYSE Arca Gold Miners Index. It holds 54 stocks in its basket with Canadian firms accounting for 45% of the portfolio, while the United States (17.8%) and Australia (13.5%) rounding off the top three. The fund charges 52 bps in annual fees (read: Are Gold Mining ETFs More Sizzling Bets Than Bullion?).

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