Despite the worst May stock 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 over the last week, 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 salvaging.
Last week many investors and analysts interpreted comments from Federal Reserve Chairman Jerome Powell to mean that the Fed would oversea 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 week.
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 is one specific group of stocks and ETFs that is likely to benefit from any rate cuts: growth equities and ETFs. Growth ETFs are high-quality ETFs likely to witness a revenue and earnings boost at a more rapid pace than the industry average. The equities in these ETFs use funnel back earnings into the stocks to increase the rate of return, and consequently share prices.
Some growth ETFs for investors to consider that would likely benefit from a rate cut and positive stock market sentiment include: QQQ, IWF, SPYG, MGK, VOOG.
The Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index®. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
The iShares Russell 1000 Growth ETF (IWF) seeks to track the investment results of an index composed of large- and mid-capitalization U.S. equities that exhibit growth characteristics.
The SPDR® Portfolio S&P 500® Growth ETF (SPYG) seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P® 500 Growth Index (the “Index”).
The Vanguard Mega Cap Growth ETF (MGK) seeks to track the performance of the CRSP US Mega Cap Growth Index. It employs a passively managed, full-replication approach.
Finally, the Vanguard S&P 500 Growth ETF (VOOG) invests in stocks in the Standard & Poor’s 500 Growth Index, composed of the growth companies in the S&P 500. The fund focuses on closely tracking the index’s return, which is considered a gauge of overall U.S. growth stock returns.
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