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With the inflation rate easing and the economy holding up better, the Federal Reserve, as expected, kept interest rates steady at a 22-year high in the FOMC meeting that ended on Dec 13. In a major shift, the central bank signaled three rate cuts for the next year, with the federal funds rate falling to a range of 4.4-4.9%, down from the current 5.25% to 5.50%. This indicates that the Fed will cut rates by a total of 0.75% next year compared with the previous forecast of two rate cuts in 2024, indicating that the historic rate-hiking campaign might be ending.
Following the meeting, markets have been pricing in a nearly 60% chance that the Fed will begin to cut rates at its March meeting, up from 40% the day prior, per the data from CME Group. Among the officials, 17 predict a rate cut next year, with five officials seeing a decrease of more than 0.75% while just two see no cuts. No officials see rates ticking higher in 2024.
The central bank sees inflation falling faster than initially projected, with core Personal Consumption Expenditures (PCE) likely to drop to 2.4% in 2024 from the previous expectation of 2.6%. PCE is expected to drop to 2.2% in 2025 and 2.0% in 2026 (read: Top Growth ETFs to Tap Declining Inflation Trends).
Sectors to Benefit
In a lower rate environment, high-dividend yielding sectors such as utilities and real estate will be the biggest beneficiaries, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. Additionally, securities in capital-intensive sectors like telecom would also benefit from lower rates.
Further, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and rise in economic activities. This will, in turn, increase profitability across various segments. Businesses will also face lower loan rates over time. Technology sector companies, especially those with high growth and capital expenditure, benefit from lower financing costs. This facilitates more investments in innovation and expansion.
Given this, we have highlighted popular ETFs from these sectors set to benefit on rate-cut bets.
Real Estate: Vanguard Real Estate ETF (VNQ - Free Report)
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 160 stocks in its basket, with none accounting for more than 7.1% share. VNQ has key holdings in Telecom tower REITs, retail REITs and industrial REITs with double-digit exposure each.
Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $31.6 billion and average daily volume of around 5.3 million shares a day. It charges 12 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
With AUM of $14.2 billion, Utilities Select Sector SPDR provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with a 12.9% share, while other firms hold no more than 8.2% of the assets. Electric utilities takes the top spot in terms of sectors at 65.6%, closely followed by multi utilities (28.5%).
Utilities Select Sector SPDR charges 10 bps in annual fees and sees heavy volume of around 18 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Homebuilders: iShares U.S. Home Construction ETF (ITB - Free Report)
iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.2 billion, it holds a basket of 46 stocks with a double-digit concentration on the top two firms (read: 5 Sector ETFs That Beat the Market in November).
iShares U.S. Home Construction ETF charges 40 bps in annual fees and trades in heavy volume of around 3 million shares a day on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
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 broadline retail, hotels, restaurants and leisure, automobiles, and specialty retail 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 billion and an average daily volume of around 6 million shares. Its expense ratio is 0.10% and it has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Technology: Vanguard Information Technology ETF (VGT - Free Report)
With AUM of $57.5 billion, Vanguard Information Technology ETF provides exposure to 318 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Systems software, technology hardware storage & peripheral, semiconductors and application software are the top four sectors.
Vanguard Information Technology ETF has an expense ratio of 0.10%, while volume is solid at nearly 469,000 shares. It has a Zacks ETF Rank #1 (read: Invest Like Billionaires With These Stocks & ETFs).
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Sector ETFs to Benefit From Fed Rate Cut Talks
With the inflation rate easing and the economy holding up better, the Federal Reserve, as expected, kept interest rates steady at a 22-year high in the FOMC meeting that ended on Dec 13. In a major shift, the central bank signaled three rate cuts for the next year, with the federal funds rate falling to a range of 4.4-4.9%, down from the current 5.25% to 5.50%. This indicates that the Fed will cut rates by a total of 0.75% next year compared with the previous forecast of two rate cuts in 2024, indicating that the historic rate-hiking campaign might be ending.
Following the meeting, markets have been pricing in a nearly 60% chance that the Fed will begin to cut rates at its March meeting, up from 40% the day prior, per the data from CME Group. Among the officials, 17 predict a rate cut next year, with five officials seeing a decrease of more than 0.75% while just two see no cuts. No officials see rates ticking higher in 2024.
The central bank sees inflation falling faster than initially projected, with core Personal Consumption Expenditures (PCE) likely to drop to 2.4% in 2024 from the previous expectation of 2.6%. PCE is expected to drop to 2.2% in 2025 and 2.0% in 2026 (read: Top Growth ETFs to Tap Declining Inflation Trends).
Sectors to Benefit
In a lower rate environment, high-dividend yielding sectors such as utilities and real estate will be the biggest beneficiaries, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. Additionally, securities in capital-intensive sectors like telecom would also benefit from lower rates.
Further, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and rise in economic activities. This will, in turn, increase profitability across various segments. Businesses will also face lower loan rates over time. Technology sector companies, especially those with high growth and capital expenditure, benefit from lower financing costs. This facilitates more investments in innovation and expansion.
Given this, we have highlighted popular ETFs from these sectors set to benefit on rate-cut bets.
Real Estate: Vanguard Real Estate ETF (VNQ - Free Report)
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 160 stocks in its basket, with none accounting for more than 7.1% share. VNQ has key holdings in Telecom tower REITs, retail REITs and industrial REITs with double-digit exposure each.
Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $31.6 billion and average daily volume of around 5.3 million shares a day. It charges 12 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Utilities: Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $14.2 billion, Utilities Select Sector SPDR provides exposure to a small basket of 30 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with a 12.9% share, while other firms hold no more than 8.2% of the assets. Electric utilities takes the top spot in terms of sectors at 65.6%, closely followed by multi utilities (28.5%).
Utilities Select Sector SPDR charges 10 bps in annual fees and sees heavy volume of around 18 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Homebuilders: iShares U.S. Home Construction ETF (ITB - Free Report)
iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.2 billion, it holds a basket of 46 stocks with a double-digit concentration on the top two firms (read: 5 Sector ETFs That Beat the Market in November).
iShares U.S. Home Construction ETF charges 40 bps in annual fees and trades in heavy volume of around 3 million shares a day on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
Consumer Discretionary: Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)
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 broadline retail, hotels, restaurants and leisure, automobiles, and specialty retail 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 billion and an average daily volume of around 6 million shares. Its expense ratio is 0.10% and it has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.
Technology: Vanguard Information Technology ETF (VGT - Free Report)
With AUM of $57.5 billion, Vanguard Information Technology ETF provides exposure to 318 technology stocks. It currently tracks the MSCI US Investable Market Information Technology 25/50 Index. Systems software, technology hardware storage & peripheral, semiconductors and application software are the top four sectors.
Vanguard Information Technology ETF has an expense ratio of 0.10%, while volume is solid at nearly 469,000 shares. It has a Zacks ETF Rank #1 (read: Invest Like Billionaires With These Stocks & ETFs).