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Rate Cuts in the Cards: Bet on Leveraged Rate-Sensitive ETFs
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Interest rate cuts are likely in 2024 following a period of rate hikes. The Federal Reserve has kept the federal funds rate steady at 5.25%-5.50% since late 2023 and penciled in three rate cuts for 2024, compared with the previous forecast of two. The cuts are expected to bring the key policy rate down to 4.4-4.9% by the end of 2024.
This shift in its monetary policy approach is a result of gradual control of inflation and aims to support a stable economic environment without triggering a recession or a significant rise in unemployment (read: Sector ETFs to Benefit From Fed Rate Cut Talks).
Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. This 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.
In such a scenario, investors could make a short-term bullish play on the rate-sensitive sectors as these spaces are likely to see huge gains in the wake of rate cut talks.
How to Play?
While futures or long-stock approaches are some of the possibilities, leveraged ETFs might be good options. Leveraged ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying sector using various investment strategies such as swaps, futures contracts and other derivative instruments.
As most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or a year) due to the compounding effect.
However, these funds are cheaper options than directly going long or utilizing futures contracts. Given this, investors seeking to capitalize on the steady/declining rate scenario in a short span could consider any of the following ETFs, given the bullish outlook for the sectors.
ProShares Ultra Real Estate (URE - Free Report) ): This fund seeks to deliver two times the daily performance of the S&P Real Estate Select Sector Index. It has AUM of $61.2 million and charges 95 bps in annual fees.
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN - Free Report) ): This product seeks to deliver three times the performance of the Real Estate Select Sector Index. It has AUM of $63.9 million and charges 95 bps in annual fees.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) ): It provides leveraged exposure to homebuilders and creates a three-time long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 93 bps and has accumulated $280.1 million in its asset base (read: Falling Mortgage Rates Boost Housing ETFs).
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT - Free Report) ): It offers leveraged exposure to the consumer discretionary sector, providing three times exposure to the Consumer Discretionary Select Sector Index. It has AUM of $35 million and charges 95 bps in annual fees.
Direxion Daily Financial Bull 3x Shares (FAS - Free Report) ): It provides three times exposure to the performance of the Financial Select Sector Index. The fund has amassed nearly $1.9 billion in its asset base and charges 91 bps in annual fees.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the Fed monetary shift in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.
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Rate Cuts in the Cards: Bet on Leveraged Rate-Sensitive ETFs
Interest rate cuts are likely in 2024 following a period of rate hikes. The Federal Reserve has kept the federal funds rate steady at 5.25%-5.50% since late 2023 and penciled in three rate cuts for 2024, compared with the previous forecast of two. The cuts are expected to bring the key policy rate down to 4.4-4.9% by the end of 2024.
This shift in its monetary policy approach is a result of gradual control of inflation and aims to support a stable economic environment without triggering a recession or a significant rise in unemployment (read: Sector ETFs to Benefit From Fed Rate Cut Talks).
Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. This 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.
In such a scenario, investors could make a short-term bullish play on the rate-sensitive sectors as these spaces are likely to see huge gains in the wake of rate cut talks.
How to Play?
While futures or long-stock approaches are some of the possibilities, leveraged ETFs might be good options. Leveraged ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying sector using various investment strategies such as swaps, futures contracts and other derivative instruments.
As most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or a year) due to the compounding effect.
However, these funds are cheaper options than directly going long or utilizing futures contracts. Given this, investors seeking to capitalize on the steady/declining rate scenario in a short span could consider any of the following ETFs, given the bullish outlook for the sectors.
ProShares Ultra Real Estate (URE - Free Report) ): This fund seeks to deliver two times the daily performance of the S&P Real Estate Select Sector Index. It has AUM of $61.2 million and charges 95 bps in annual fees.
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN - Free Report) ): This product seeks to deliver three times the performance of the Real Estate Select Sector Index. It has AUM of $63.9 million and charges 95 bps in annual fees.
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL - Free Report) ): It provides leveraged exposure to homebuilders and creates a three-time long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 93 bps and has accumulated $280.1 million in its asset base (read: Falling Mortgage Rates Boost Housing ETFs).
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT - Free Report) ): It offers leveraged exposure to the consumer discretionary sector, providing three times exposure to the Consumer Discretionary Select Sector Index. It has AUM of $35 million and charges 95 bps in annual fees.
Direxion Daily Financial Bull 3x Shares (FAS - Free Report) ): It provides three times exposure to the performance of the Financial Select Sector Index. The fund has amassed nearly $1.9 billion in its asset base and charges 91 bps in annual fees.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the Fed monetary shift in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.