Fed Rate Cuts Are Coming: An ETF Playbook Fed Rate Cuts Are Coming: An ETF Playbook Fed Rate Cuts Are Coming: An ETF Playbook

Fed Rate Cuts Are Coming: An ETF Playbook

Macro
Charu Chanana

Head of FX Strategy

With the Federal Reserve expected to cut rates, it’s time to consider how your portfolio is positioned for this shift. Rate cuts typically bring about significant changes in market behavior, and exchange-traded funds (ETFs) offer a flexible way to adjust your portfolio accordingly. Let’s look at the sectors and ETFs that could be considered to help you navigate this new environment.

 

1. Homebuilders: A Rate-Cut Winner

Lower interest rates tend to reduce mortgage costs, potentially reigniting demand for homes and boosting the housing market. Homebuilders stand to benefit from this dynamic, making them a solid play in the early stages of rate cuts.

  • iShares U.S. Home Construction ETF (ITB): Offers exposure to homebuilders and companies involved in home improvement, which could see increased demand as lower borrowing costs boost home sales.
  • SPDR S&P Homebuilders ETF (XHB): Provides broad exposure to the homebuilding sector, including materials and home improvement retailers, benefiting from increased housing market activity.

 

2. Small Caps: Positioned for Growth

Small-cap stocks, especially in the U.S., tend to perform well in a falling rate environment due to their reliance on domestic borrowing and growth. Lower rates reduce financing costs for smaller companies, giving them room to expand.

  • iShares Russell 2000 ETF (IWM): This ETF provides broad exposure to small-cap U.S. companies, which could benefit from easier borrowing conditions and an improving economic outlook.
  • Vanguard Small-Cap ETF (VB): Another option for exposure to small-cap stocks across various sectors, allowing investors to capture growth potential in a low-rate environment.
  • Invesco S&P SmallCap Information Technology ETF (PSCT): While large tech companies may be overvalued, small-cap tech firms could see renewed interest. PSCT focuses on small-cap tech stocks, offering a more affordable entry into tech's growth potential and AI plays.

 

3. Defensive Play: Consumer Staples and Utilities

With the economy potentially heading into a recession, consumer staples and utilities become attractive for their stability. These sectors tend to outperform during economic slowdowns, providing steady dividends and reduced volatility.

  • Consumer Staples Select Sector SPDR Fund (XLP): This ETF focuses on large companies that provide essential goods, making it a solid defensive play as consumers tighten their wallets.
  • Utilities Select Sector SPDR Fund (XLU): Utilities benefit from consistent demand and provide investors with stable dividends. XLU offers exposure to large utility companies that could outperform in a volatile market.

 

4. Income Focus: REITs and Dividend Stocks

As rates fall, income-producing assets such as REITs (Real Estate Investment Trusts) and high-dividend stocks become more attractive. These assets tend to benefit from lower financing costs and investor demand for yield.

  • Vanguard Real Estate ETF (VNQ): This ETF provides exposure to a wide range of REITs that could benefit from lower interest rates and stronger real estate demand.
  • Schwab U.S. REIT ETF (SCHH): Another solid option for REIT exposure, focusing on high-quality real estate investments that stand to gain from favorable financing conditions.
  • iShares Select Dividend ETF (DVY): This ETF focuses on high-dividend stocks in sectors like utilities, energy, and consumer staples, providing consistent income in a low-rate environment.
  • Schwab U.S. Dividend Equity ETF (SCHD): Offers exposure to high dividend-yielding U.S. stocks, providing a steady income stream as investors seek yield.

 

5. Commodities and Precious Metals

A weaker dollar resulting from rate cuts can drive up commodity prices. While activity commodities such as oil and copper might be influenced by recession worries, precious metals are likely to benefit more from Fed rate cuts due to reduced funding costs.

  • SPDR Gold Shares (GLD): Gold typically gains during periods of economic uncertainty and falling interest rates. GLD is one of the most liquid gold ETFs, making it a reliable hedge.
  • VanEck Vectors Gold Miners ETF (GDX): Offers exposure to gold mining companies, which can benefit from rising gold prices due to their direct link to the price of gold.
  • iShares Silver Trust (SLV): Provides exposure to silver, which, like gold, benefits from a weakening dollar and serves as a hedge against inflation and economic uncertainty.

 

6. Currency Play: Japanese Yen and Swiss Franc

The U.S. dollar typically weakens in response to rate cuts, making safe-haven currencies like the Japanese yen and Swiss franc more attractive. If you're looking to diversify currency risk, consider adding yen exposure to your portfolio.

  • Invesco CurrencyShares Japanese Yen Trust (FXY): This Japanese yen ETF provides direct exposure to the Japanese yen, offering a hedge against a weakening U.S. dollar in a falling rate environment.
  • Invesco CurrencyShares Swiss Franc Trust (FXF): Offers exposure to the Swiss franc, another safe-haven currency that can benefit from a weaker dollar and economic uncertainty.

 

7. Fixed Income: Shorter Duration Bonds and TIPS

Falling interest rates increase the value of existing bonds, but investors should be cautious with long-duration bonds as inflation risks rise. Inflation-protected securities (TIPS) offer a way to maintain income while hedging against future inflation.

  • iShares 1-3 Year Treasury Bond ETF (SHY): This ETF provides exposure to short-term Treasury bonds, reducing interest rate risk while offering steady income.
  • iShares TIPS Bond ETF (TIP): TIP offers protection against inflation, making it a smart addition as inflationary risks grow in a low-rate environment.
  • Vanguard Short-Term Inflation-Protected Securities ETF (VTIP): Provides exposure to short-term TIPS, offering inflation protection with lower interest rate risk.

 

8. Yield Curve Disinversion: Steepener ETFs in Play

A rate cut by the Fed often leads to a steepening of the yield curve, meaning the difference between short-term and long-term interest rates increases. This can benefit certain bond strategies.

  • Amundi US Curve Steepening 2-10Y UCITS ETF (STPU): This ETF aims to benefit from a steepening yield curve between 2 and 10 years, providing a direct play on the anticipated widening of the yield gap.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.