Fed rate cuts are here: An ETF playbook (UCITS)

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.

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.

• Invesco Real Estate S&P US Select Sector UCITS ETF (XRES): This ETF offers exposure to U.S. real estate, including homebuilders, which stand to benefit from lower borrowing costs.

• VanEck Global Real Estate UCITS ETF (TRET): Provides global exposure to real estate companies, including homebuilders, benefiting from favorable financing conditions.

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.

• SPDR Russell 2000 U.S. Small Cap UCITS ETF (ZPRR): Tracks U.S. small-cap companies, which are likely to benefit from improved borrowing conditions.

• iShares S&P SmallCap 600 UCITS ETF (IUS3): Offers broad exposure to small-cap U.S. stocks, poised for growth as financing costs drop.

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.

• iShares S&P 500 Consumer Staples Sector UCITS ETF (IUCS): Offers exposure to U.S. consumer staples, a defensive play for times of economic slowdown.

• iShares S&P 500 Utilities Sector UCITS ETF (2B7A): Tracks U.S. utilities companies, known for consistent demand and stability during recessions.

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.

• SPDR S&P U.S. Dividend Aristocrats UCITS ETF (SPYD): Focuses on high-dividend U.S. stocks, providing a reliable income stream.

• SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV): Offers global exposure to dividend-paying stocks, a reliable source of income in a low-rate environment.

• Global X Data Center REITs & Digital Infrastructure UCITS ETF (V9N): Focuses on REITs in data centers and digital infrastructure, which stand to benefit from falling rates and continued tech demand.

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.

• VanEck Gold Miners UCITS ETF (GDX): Provides exposure to gold mining companies, which benefit from rising gold prices.

• ZKB Gold (USD) ETF (ZGLDUS): Offers direct exposure to gold, a key hedge during economic uncertainty and lower interest rates.

• Global X Silver Miners UCITS ETF (SLVR): Tracks silver miners, offering a play on the rising value of silver in a weakening dollar environment. 

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 USD treasury bond 1-3 years UCITS ETF (IBTA): Offers exposure to short-term U.S. Treasury bonds, helping mitigate interest rate risk while providing income.

• iShares Global inflation-linked government bond UCITS ETF (IGIL): Provides exposure to inflation-protected bonds globally, offering a hedge against inflation as rates fall.

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