U.S. stocks traded higher on Thursday, battling their way back from a brutal selloff over the past month, after Federal Reserve Chairman Jerome Powell intimated that the central bank was open to relaxing its monetary policy to save the economy, and as trade tensions eased amid comments by China and Mexico.
“The market wanted to hear from Powell. When Powell says ‘we are watching the market’ — whether it’s right or wrong — the market starts believing in a Powell put,” said Keith Lerner, chief market strategist at SunTrust Private Wealth. He also noted “sentiment became extremely negative on a short-term basis.”
While the Fed cutting rates is often the result of a struggling economy and an attempt to bolster growth, the good news for ETF investors is that there are several sectors of ETFs that are likely to benefit from any rate cuts.
Gold ETFs Could Become More Lustrous If Rates Are Cut
Gold prices rose on Thursday, edging closer to their loftiest levels this year on increased expectations of a U.S. rate cut, even as some investors locked in profits from bullion’s recent rally. Gold is believed by many investors to be inversely correlated with interest rates. Rising interest rates make bonds and other fixed-income investments more attractive, so money will flow into higher-yielding investments, such as bonds and money market funds, and out of gold, which offers no yield at all during times of higher interest rates, and back into gold ETFs like the SPDR Gold Trust (GLD) as interest rates drop.
“Gold’s strength is most certainly based on the prompt change in the market outlook on how aggressively the Fed will cut rates over the coming months,” Saxo Bank commodity strategist Ole Hansen said.
Dividend ETFs Could Become A Haven If Rates Drop
When interest rates drop, investors usually look for better returns elsewhere. Dividend paying ETFs like the S&P 500 Dividend Aristocrats ETF NOBL) offer investors potentially higher yields and more income than they might get in a traditional money market account or fixed income investment, during a falling interest rate environment.
Utility ETFs Appeal As An Escape From Risk
Investors who are looking for companies to invest in that carry minimal risk will often consider utility stocks. Utility companies typically comprise the most fundamental necessities, such as food, water and shelter, or are closely related to the energy required to refrigerate food, heat up water and light up a house. When markets are struggling, as is usually indicative of a falling interest rate environment due to rate cuts, utility ETFs like the Utilities Select Sector SPDR (XLU) become a perceived safety net for investors looking to mitigate risk.
Emerging Market ETFs Could Get A Boost
As rates are cut, investors look for other places to put their hard-earned capital that may offer enhanced growth opportunities than the domestic conundrum. Emerging market ETFs like the iShares MSCI India ETF (INDA), which offers direct investment in Indian companies, could become a hot spot for investors seeking higher returns.
Homebuilder ETFs Could See Renewed Interest
Declining interest rates could reinforce interest in homebuilder ETFs, as investors look at lower mortgage rates and slower home price growth as an opportunity to buy into the homebuilder sector. Homebuilder ETFs like the iShares U.S. Home Construction ETF (ITB) could reap the benefits.
For more market trends, visit ETFtrends.com.