Can these ETFs make money by cutting interest rates? US Stock ETF Investment

What are the good performing assets to start the interest rate cut cycle?

The global economy has entered a new stage, and central banks have begun to cut interest rates to stimulate the economy. Investors need to readjust their investment portfolios and look for assets that have performed outstandingly in the interest rate cuts.

As an efficient and diversified investment tool, exchange traded funds (ETFs) have become the preferred choice for investors.

Which ETFs are worth paying attention to during the interest rate cut cycle? Below we will provide you with a detailed analysis!

The impact of interest rate cuts on the market

Cutting interest rates will lead to a decrease in the coupon rate of newly issued bonds and an increase in the price of already issued high-yield bonds, especially long-term bonds;

Reducing the financing costs of enterprises, increasing profit margins, and overall boosting the stock market. Defensive sectors benefit first, while growth and cyclical sectors relay;

The weakening of the US dollar may push up the prices of commodities priced in US dollars, such as gold and industrial metals; 

The decrease in mortgage loan interest rates has stimulated demand in the real estate market.

Debt ETF: Enjoy the dividend of interest rate reduction

Long term treasury bond bond ETF:

1. iShares 20+ Year Treasury Bond ETF (TLT)
2. Vanguard Long-Term Bond ETF (BLV)

At the initial stage of interest rate reduction, the yield of long-term treasury bond will decrease and the price will rise. Long term treasury bond ETFs have bought a lot of long-term treasury bond. When the interest rate drops, they can make a profit. This kind of investment is suitable for investors who do not like taking risks and want to make money steadily.

In the past interest rate cutting cycles, ETFs of long-term treasury bond bonds such as TLT have performed well, with yields significantly higher than those of short-term bonds and money market funds.

High Yield Bond ETF

1. iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
2. SPDR Bloomberg High Yield Bond ETF (JNK)

Interest rate cuts have reduced corporate financing costs, improved the financial situation of high-yield bond issuers, and lowered default risks. The credit spread of high-yield bonds may narrow and prices may rise. In addition, high-yield bonds have higher coupon rates, which can provide objective interest income.

It should be noted that high-yield bonds, also known as “junk bonds,” have higher risks than investment grade bonds. Investors should invest cautiously based on their own risk tolerance.

Stock ETF: From Defense to Growth Defense ETF

1. Utilities Select Sector SPDR Fund (XLU)
2. Consumer Staples Select Sector SPDR Fund (XLP)

In the early stages of interest rate cuts, market uncertainty is high and funds often flow into defensive sectors. The public utilities and essential consumer goods industries have stable cash flows and high dividend yields, providing investors with defensive investment options.

Growth oriented technology stock ETF

1. Invesco QQQ Trust (QQQ)
2. ARK Innovation ETF (ARKK)

In a low interest rate environment, the discounted value of future cash flows increases, leading to an increase in the valuation of growth technology companies. The technology industry has high growth and innovation capabilities, and can generate excess returns during interest rate cuts. In previous interest rate cut cycles, technology ETFs such as QQ often performed better than the overall market index, bringing substantial returns to investors.

Cyclical industry ETF

1. Financial Select Sector SPDR Fund (XLF)
2. Industrial Select Sector SPDR Fund (XLI)

With interest rate cuts stimulating economic recovery, the profitability of cyclical industries has improved. The financial industry benefits from the increased demand for loans, while the industrial industry benefits from the growth of capital expenditures and infrastructure investments.

Commodity ETFs: Opportunities for Precious Metals and Industrial Metals

Gold ETF

1. SPDR Gold Trust (GLD)
2. iShares Gold Trust (IAU)

Interest rate cuts typically lead to a weakening of the US dollar and an increase in inflation expectations. As a safe haven asset and anti inflation tool, gold’s demand and price may rise. Gold ETFs provide a convenient way to invest in gold without actually holding physical gold.

Industrial Metal ETF

1. iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC)
2. Invesco DB Base Metals Fund (DBB)

The economic recovery has driven industrial production and infrastructure construction, increasing the demand for industrial metals such as copper and aluminum. Industrial metal prices have risen, benefiting related ETFs. For investors who are optimistic about global economic growth, this is an area worth considering.

Real Estate ETFs: Winners in Low Interest Rate Environments

Residential Real Estate ETF

1. iShares U.S. Home Construction ETF (ITB)
2. SPDR S&P Homebuilders ETF (XHB)

The interest rate cut has lowered the mortgage loan interest rate, lowered the cost of buying a house, and stimulated housing demand. Residential real estate ETFs investing in residential construction companies and related industries can directly benefit from the recovery of the real estate market.

Commercial Real Estate ETF

Vanguard Real Estate ETF (VNQ)

Schwab U.S. REIT ETF (SCHH)

Low interest rates have reduced the financing costs of commercial real estate companies and increased the attractiveness of real estate investment trusts (REITs). As economic activity increases, rental income and asset value of commercial real estate may rise.

Emerging Market ETFs: Benefiting from Capital Inflows and Weakness of the US Dollar

Emerging Market Bond ETF

1. iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)

The weakening of the US dollar and the trend of global funds seeking high-yield assets may drive capital inflows into emerging markets. Emerging market bond ETFs investing in US dollar denominated emerging market bonds can benefit from price increases brought by capital inflows while obtaining higher returns.

Emerging market stock ETF

1. Vanguard FTSE Emerging Markets ETF (VWO)

Emerging market countries may perform outstandingly in the global economic recovery, and their stock markets have high growth potential. Emerging market stock ETFs provide broad market coverage and are suitable for investors seeking diversification and high growth.

Interest rate cuts bring more investment opportunities to everyone, but the market will also be more volatile and uncertain. Investors need to adjust their investments based on their risk tolerance, investment time, and how much money they want to earn.

ETF, as an investment tool, is convenient to buy and sell, transparent in information, and low in cost, which can help investors diversify risks and seize profit opportunities.

Disclaimer: The content of this article is for reference only and does not constitute investment advice. Investment carries risks, and caution is necessary when entering the market.