With most investors anticipating a Federal Reserve rate cut this week as likely a sure thing, many are scrambling to find the sectors and corresponding ETFs that are likely to benefit the most following the cut.
U.S. markets received a boost after Chairman Powell’s intimation of a rate cut last month, and once again after New York Fed President John Williams said central banks must take action when faced with adverse economic conditions, fueling bets that the Fed could take on a more aggressive 0.5% rate cut in July. However, the bank later clarified that Williams did not intend to signal any specific policy changes.
“Given that a 50-basis-point cut would trigger a further rally in global equities, any remark of dovish nature translates immediately into higher asset prices,” Ipek Ozkardeskaya, a senior analyst at London Capital Group, told the WSJ.
Some of the sectors likely to receive a boost after the Fed starts cutting rates include Materials, Industrials, Consumer Discretionary, and Consumer Staples.
With a weight of just 2.61%, materials is the smallest sector allocation in the S&P 500. But if a rate cut is expected, it could be a top performer. Investors looking at materials ETFs as a way to get positioned in the market could consider Materials Select Sector SPDR (XLB) or the Fidelity MSCI Materials ETF (FMAT).
Despite issues with Boeing, the Industrials Sector is holding up considerably well. The Industrial Select Sector SPDR (XLI) and the iShares U.S. Aerospace & Defense ETF (ITA), are 2 ETFs that offer investors a way to participate in a move in the sector due to rate cuts.
Consumer Discretionary Sector
The Consumer Discretionary Select Sector SPDR (XLY), the largest exchange-traded fund dedicated to the consumer discretionary sector, was up nearly 18% year-to-date at the start of June 11, putting it nearly 240 basis points ahead of the S&P 500. Investors looking for a boost in the sector using ETFs could play the Fidelity MSCI Consumer Discretionary ETF (FDIS) or the Amplify International Online Retail ETF (XBUY).
Consumer Staples Sector
Consumer staples are those items that appear in our cupboards and closets, from shaving cream to soda. For investors looking to get involved with this sector, if it gets a jumpstart from rate cuts, the Vanguard Consumer Staples ETF (VDC) or the Consumer Staples Select Sector SPDR ETF (XLP) are two ways to engage with the sector.
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