If the CME FedWatch Tool is correct, then there’s a 90% chance the U.S. Federal Reserve institutes a rate cut of 25 basis points. It should result in positive moves for a market that’s been expecting rate cuts all year, but four sectors in particular should benefit from easing monetary policy.
1) Home builders
The 30-year mortgage rate has been ticking lower recently, and home builders will keep an eye on prevailing interest rates through the rest of the year. Mortgage rates have more than doubled since falling below 3% during the Covid years in 2020 and 2021 so ultra-aggressive cuts will be necessary in order to get back to that level again. Nonetheless, rate cuts can help entice prospective homebuyers and help jumpstart the housing industry.
With that, consider 3x exposure to home builders with the Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL). It tracks the the Dow Jones U.S. Select Home Construction Index, providing exposure to companies involved in home construction as well as suppliers of building materials, furnishings, and fixtures.
2) Small Cap Stocks
If small cap stocks make a comeback, lower rates can help turbocharge a rally. Because small cap companies typically rely on financing in order to fund operations, lower interest rates will help reduce financing costs. Any excess capital after expenses can be reinvested in growth or other activities that help expand their businesses.
Traders who sense a small cap rally ahead can look at the Direxion Daily Small Cap Bull 3X Shares (TNA). It tracks the benchmark for small caps, the Russell 2000 Index, and adds 300% exposure.
3) Emerging Markets
The strength of emerging markets (EM) is typically anchored to strength in their local currencies. That said, a weaker dollar resulting from easing monetary policy presents a favorable economic environment for EM assets.
With that, traders can look at the Direxion Daily MSCI Emerging Markets Bull 3X Shares (EDC) for maximizing bullishness. The fund adds 300% exposure to the MSCI Emerging Markets Index, which includes large- and mid-capitalization securities spread across various EM countries.
4) The Financial Sector
Lastly, the financial sector could also benefit from lower rates, especially companies that derive much of their revenue from loans or other financing arrangements. Lower rates will obviously entice more consumer borrowing whether it’s credit cards, car loans, home loans, or other financing.
If the financial sector benefits, traders can consider the Direxion Daily Financial Bull 3X ETF (FAS), which adds 3x exposure to the Financial Select Sector Index. The index covers a wide swathe of the financial sector, incorporating companies such as banks, mortgage companies, consumer finance, insurance, and other financial services.
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