The Federal Reserve Chair Jerome Powell once again surprised the Wall Street by slashing interest rate to near zero, the lowest level since late 2015, and launching a quantitative easing program of at least $700 billion. The central bank will buy at least $500 billion in Treasury securities and at least $200 billion in mortgage-backed securities in the coming months.
Also, it would eliminate bank reserve requirements (the amount of cash banks are required to keep on hand at any given time) beginning on Mar 26 and encourage banks to use the discount window to access quick financing. Further, the Fed struck a deal with five foreign central banks — the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank — to lower their rates on currency swaps to keep the financial markets functioning normally.
The series of measures came in an effort to save the U.S. economy from the fallout of the deadly coronavirus, which has infected 3,000 people and killed at least 61. The move came in less than two weeks after the central bank cut rates by 50 basis point to a range of 1-1.25% (read: ETFs to the Rescue as Coronavirus Wreaks Havoc).
Rate Cut: A Boon
A rate cut is a boon for rate sensitive and high-yield sectors such as utilities and real estate. When interest rates decline, 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 shareholders annually in the form of dividends.
Homebuilders will also get a boost as low yields will translate into lower rates, which in turn 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 rise in economic activities. This will, in turn, increase profitability across various segments (read: Here's Why You Should Buy Homebuilder ETFs Now).
In such a scenario, investors could make a play on the rate-sensitive sectors as these spaces will continue to trade smoothly in the wake of rate cuts or easing policies. Though the broad sell-off will hurt these sectors as well, investors could view the dip as a solid buying opportunity.
Below, we have highlighted some rate sensitive ETFs & stocks that could be excellent plays for investors in the coming weeks.
Schwab US REIT ETF (SCHH - Free Report)
SCHH tracks the Dow Jones U.S. Select REIT Index, holding a well-diversified 98 stocks with none accounting for more than 9.4% of the assets. Residential REITs make up for the largest share at 29.1% while retail REITs, specialized REITs, industrial REITs and office REITs round off the next four spots with double-digit allocation each. The product has AUM of $5.9 billion and average daily trading volume of 835,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Mortgage Real Estate ETF (REM - Free Report)
This is the most popular mortgage REIT ETF with AUM of $1.3 billion and average daily volume of 399,000 shares. It offers exposure to the U.S. residential and commercial mortgage real estate sectors by tracking the FTSE Nareit All Mortgage Capped Index. Holding 36 stocks in its basket, the fund is highly concentrated on the top two firms with a combined 27.7% share while other firms make up for less than 8.5% of the assets. It charges investors 48 bps a year in fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook (read: Mortgage Real Estate ETF Hits New 52-Week High).
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $13 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 13.6% share while other firms hold no more than 7.9% of the assets. Electric utilities takes the top spot in terms of sectors at 63.1%, closely followed by multi utilities (31.4%). The product charges 13 bps in annual fees and sees heavy volume of around 18.1 million shares on average. XLU has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
iShares U.S. Home Construction ETF (ITB - Free Report)
This ETF provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks with double-digit allocation going to the top two firms and other accounts for no more than 9.7% of the assets. Homebuilding takes the top spot at 62.1%, followed by 14.1% in building products and 11.6% in home improvement retail. The product has amassed $1.4 billion in its asset base and trades in heavy volume of around 2.7 million shares a day on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #2 with a High risk outlook (read: 5 Top-Ranked Sector ETFs to Buy at Bargain Price).
PG&E Corporation (PCG - Free Report)
It is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The company is engaged in the sale and delivery of electricity and natural gas to residential, commercial, industrial, and agricultural customers in northern and central California. The stock saw positive earnings estimate revision of 3 cents for this year over the past month and has an estimated growth rate of 4.3%. It carries a Zacks Rank #2 and has a VGM Score of B.
LGI Homes Inc. (LGIH - Free Report)
This company is engaged in the design and construction of entry-level homes across Texas, Arizona, Florida and Georgia. It saw solid earnings estimate revision of 13 cents over the past month for this year and has an estimated growth rate of 16.4%. It has a Zacks Rank #3 and a VGM Score of A.
Gibraltar Industries Inc. (ROCK - Free Report)
This company manufactures and distributes products to the industrial and buildings market. It saw positive earnings estimate revision of 16 cents for this year over the past month and has an estimated growth rate of 16.7%. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
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