ETFs For After The Rate Cut
October 29th at 11:00am by Tom Lydon
Exchange traded funds (ETFs) across several sectors will feel the impact of the Federal Reserve’s decision today to cut rates by 0.5% in an effort to revive the economy and get the credit markets flowing freely once again.
This rate cut would leave the rate at its lowest level in four years, and would be the ninth cut since September 2007, reports Trang Ho for Investors Business Daily. Earnings reports for 100 companies within the S&P 500 are also expected out at the same time, leaving investors white-knuckled.
Not only is this interest rate cut an attempt to boost the weak economy, but to lure consumers and businesses to spend again. It also lowers the yields on money market accounts and savings, enticing investors to get back into the equities game.
Ho suggests a few sectors that tend to do well after a rate cut:
- Financials: A cheaper lending rate would up the profit margins for banks. Today, credit remains tight and borrowers are scarce, while 30-year mortgages are no cheaper than they were a year ago. SPDR Financials (XLF) is down 47.4% year-to-date.
- Currencies: A rate cut devalues currency, but if other nations follow in a rate cut, the values would remain. Japan has a 0.5% key rate, leaving little to take off, strengthening the yen. Yet the Nikkei Shimbun reported Tuesday that the central bank may cut to 0.25%. CurrencyShares Japanese Yen (FXY) is up 13.8% year-to-date.
- Bonds: Long-term corporate bonds rise when rates fall, and with a lower short term rate, analysts expect longer dated corporate high yields to recover as more investors leave Treasuries and take up these bond ETFs. iShares iBoxx $Investment Grade Corporate Bond Fund (LQD) is down 17% year-to-date.
Read the disclosure, as Tom Lydon is a board member of Rydex Funds.
