After a tumultuous selloff in May, resulting in the worst market performance since 2012, where stocks lost more than 6% amidst trade war concerns about China and more recently Mexico, the stock market has come roaring back in June, regaining much of its lost ground. The recovery appears to be stimulated largely by expectations that the Federal Reserve will cut rates if the market needs rescuing.
Many investors and analysts interpreted recent comments from Federal Reserve Chairman Jerome Powell to mean that the Fed would safeguard the economy and take necessary measures to prevent the market from sinking.
“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.”
These comments were further coupled with weak jobs data, which is often an indication for the Fed to cut rates as well. Lower rates would make borrowing cheaper, offering a boost for new investment projects, and an incentive to pay off higher interest rate debt. These two factors often contribute to spurring the stock market to rally higher, as it has done over the last couple of weeks.
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 market sectors and associated ETFs that are likely to be rewarded from any rate cuts:
Utilities and Real Estate ETFs
The real estate and utilities sectors are rate sensitive areas that would likely benefit from any cut in rates that the Fed might make. Investors looking at these sectors might delve into utilities and REITS using the Utilities Select Sector SPDR (XLU) and Vanguard Utilities ETF (VPU), or the iShares Cohen & Steers REIT ETF (ICF) and the NuShares Short-Term REIT ETF (NURE).
Homebuilder optimism is likely to get a boost due to any decline in interest rates, sparked by Fed adjustments. Investors looking at these sectors might delve into the iShares US Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB).
Dividend Paying ETFs
If the Fed opts to cut rates, investing are likely to target dividend paying ETFs and stocks as they search for higher yields than what bonds might offer. Investors who’d like to front fun this trend might look at the iShares Core High Dividend ETF (HDV) or the Vanguard High Dividend Yield ETF (VYM)
Emerging Market ETFs
Any rate cuts by the Fed are bound to garner interest in emerging market investment, although war tensions are certainly still a factor that might hinder this process. Investors looking at emerging market ETFs could explore the iShares Core MSCI Emerging Markets ETF (IEMG) or the Vanguard FTSE Emerging Markets ETF (VWO).
For more investing ideas, visit ETFtrends.com.