We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
The Consumer Price Index (CPI) showed prices rose 0% over last month and 3.2% over the prior year in October, a deceleration from September's 0.4% monthly increase and 3.7% annual gain in prices. Core inflation marked its slowest pace in over two years.
Economists' expectations fell short of the actual data, as they had predicted a 0.1% month-over-month increase and a 3.3% year-over-year increase in prices. Core prices were also anticipated to rise by 0.3% over the prior month and 4.1% over the previous year.
Cooling inflation triggered the possibility of a less-hawkish Fed, going forward. Following the release of this data, market indicators showed a nearly 95% probability that the Federal Reserve would keep interest rates unchanged in December, as reflected in data from the CME Group.
U.S. benchmark treasury yield slumped to 4.44% on Nov 14, 2023 from 4.63% recorded the day before while the two-year Treasury notes yielded 4.80% on Nov 14, 2023, down from 5.02% recorded the day before.
In a low interest rate environment, certain sectors tend to perform better due to the reduced borrowing costs and increased consumer spending. Below we highlight those sectors and their related ETFs.
Sector ETFs in Focus
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report) ) – Up 5.6% on Nov 14
Lower interest rates make borrowing cheaper, which can boost the real estate market. This includes not just direct real estate investment, but also real estate investment trusts (REITs) and companies involved in home construction and furnishing.
Utilities – Utilities Select Sector SPDR ETF (XLU - Free Report) ) – Up 4.0% on Nov 14
Utility companies often are debt-dependent due to their significant infrastructure investments. Lower interest rates reduce the cost of servicing this debt, improving profitability. Moreover, utilities are generally seen as stable, income-generating investments, making them attractive in a low-rate environment.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) ) – Up 3.4% on Nov 14
This sector benefits as lower rates often result in increased purchasing power and higher consumer spending on non-essential items like luxury goods, travel, and entertainment. This is especially true given we are about to enter the all-important holiday season, which normally sees increased outlays on discretionary goods and services.
Technology – Technology Select Sector SPDR ETF (XLK - Free Report) ) – Up 2.0% on Nov 14
Some technology companies can benefit from lower rates, particularly those with high growth potential but not necessarily high immediate profitability, as they often rely on borrowing to finance expansion. Overall, high-growth sectors like technology always perform better in a low-rate environment.
Financials – Financial Select Sector SPDR ETF (XLF - Free Report) ) – Up 1.9% on Nov 14
Banks often perform better when the yield curve steepens. If the Fed stays put from here resulting lower short-term rates and long-term rates go up on increased activities in the economy, banks would fare better as this would result in higher net interest margin. Plus, certain financial services like mortgage lending can see increased activity due to the attractiveness of lower borrowing costs.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
5 Sector ETFs to Tap in Falling Rate Environment
The Consumer Price Index (CPI) showed prices rose 0% over last month and 3.2% over the prior year in October, a deceleration from September's 0.4% monthly increase and 3.7% annual gain in prices. Core inflation marked its slowest pace in over two years.
Economists' expectations fell short of the actual data, as they had predicted a 0.1% month-over-month increase and a 3.3% year-over-year increase in prices. Core prices were also anticipated to rise by 0.3% over the prior month and 4.1% over the previous year.
Cooling inflation triggered the possibility of a less-hawkish Fed, going forward. Following the release of this data, market indicators showed a nearly 95% probability that the Federal Reserve would keep interest rates unchanged in December, as reflected in data from the CME Group.
U.S. benchmark treasury yield slumped to 4.44% on Nov 14, 2023 from 4.63% recorded the day before while the two-year Treasury notes yielded 4.80% on Nov 14, 2023, down from 5.02% recorded the day before.
In a low interest rate environment, certain sectors tend to perform better due to the reduced borrowing costs and increased consumer spending. Below we highlight those sectors and their related ETFs.
Sector ETFs in Focus
Real Estate – Vanguard Real Estate ETF (VNQ - Free Report) ) – Up 5.6% on Nov 14
Lower interest rates make borrowing cheaper, which can boost the real estate market. This includes not just direct real estate investment, but also real estate investment trusts (REITs) and companies involved in home construction and furnishing.
Utilities – Utilities Select Sector SPDR ETF (XLU - Free Report) ) – Up 4.0% on Nov 14
Utility companies often are debt-dependent due to their significant infrastructure investments. Lower interest rates reduce the cost of servicing this debt, improving profitability. Moreover, utilities are generally seen as stable, income-generating investments, making them attractive in a low-rate environment.
Consumer Discretionary – Consumer Discretionary Select Sector SPDR ETF (XLY - Free Report) ) – Up 3.4% on Nov 14
This sector benefits as lower rates often result in increased purchasing power and higher consumer spending on non-essential items like luxury goods, travel, and entertainment. This is especially true given we are about to enter the all-important holiday season, which normally sees increased outlays on discretionary goods and services.
Technology – Technology Select Sector SPDR ETF (XLK - Free Report) ) – Up 2.0% on Nov 14
Some technology companies can benefit from lower rates, particularly those with high growth potential but not necessarily high immediate profitability, as they often rely on borrowing to finance expansion. Overall, high-growth sectors like technology always perform better in a low-rate environment.
Financials – Financial Select Sector SPDR ETF (XLF - Free Report) ) – Up 1.9% on Nov 14
Banks often perform better when the yield curve steepens. If the Fed stays put from here resulting lower short-term rates and long-term rates go up on increased activities in the economy, banks would fare better as this would result in higher net interest margin. Plus, certain financial services like mortgage lending can see increased activity due to the attractiveness of lower borrowing costs.