ETFs to Boost Gains Amid Rising Rate Cut Expectations

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Recent ADP and jobless claims, support the “soft economy” narrative, which increases the market expectations of the Fed cutting interest rates as soon as in September this year.  According to the CME FedWatch, the market prices in a 68.1% likelihood of interest rates falling to 5-5.25%.

Investor expectations of a December rate cut, prices in a probability of 46.3% for the interest rates dropping to 4.75-5%.

More Into the Data

According to Reuters, June saw the unemployment rate remaining changed at 4%, with U.S. job growth adopting a healthy pace, indicating that the Fed maybe able to control the persistent inflation levels without increasing the possibility of a recession.

The employment report by the Labor Department is anticipated to show that the rate of increase in yearly wages has slowed down to its lowest level in three years, confirming the disinflationary trend after unfavorable inflation data was witnessed in first-quarter 2024. This can help in increasing the confidence of the policymakers in starting to cut the interest rate this year.

However, even with increasing market expectations of an interest rate cut starting in September, it is important to note that the Fed will maintain a cautious approach throughout to avoid being too aggressive.

ETFs to Consider

Below, we highlight a few ETF areas that could see improved performance in the near term, given the growing likelihood of an interest rate cut by the Fed.

Currency ETFs

The greenback’s value tends to move inversely with interest rate adjustments by the Fed. Along with the “de-dollarization” trend, the rising probability of the Fed cutting interest rates this year makes the dollar less attractive to foreign investors, resulting in decreased demand for the currency.

Investing in funds that offer exposure to currencies relative to the greenback becomes an attractive investment option in such a landscape. Investors can consider Invesco DB U.S. Dollar Index Bearish Fund UDN, an appropriate option for investors with a bearish outlook on the U.S. Dollar.

Investors can also look into funds like Invesco CurrencyShares Euro Currency Trust FXE, Invesco CurrencyShares Swiss Franc Trust FXF and Invesco CurrencyShares British Pound Sterling Trust FXB.

Investing in digital currencies is also worth considering, given the possibility of a weakening greenback. IShares Bitcoin Trust Registered IBIT, Grayscale Bitcoin Trust GBTC and Bitwise Bitcoin ETF Trust BITB can be considered.

Emerging Market ETFs

The greenback’s value tends to move inversely with interest rate adjustments by the Fed. As the Fed’s rate cut prospects rise, the dollar loses appeal to foreign investors, reducing its demand. EMs tend to perform well when the U.S. dollar weakens.

The increasing likelihood of the Fed cutting interest rates will also benefit emerging markets heavily reliant on exports, resulting in increased trading activities with the United States.

Investors can consider funds like iShares Core MSCI Emerging Markets ETF IEMG, Vanguard FTSE Emerging Markets ETF VWO, iShares MSCI Emerging Markets ETF EEM and SPDR Portfolio Emerging Markets ETF SPEM.

Gold ETFs

Gold prices are inversely related to the value of the U.S. dollar as gold is priced in dollars. A weaker U.S. dollar generally leads to higher demand for gold, pushing its price upward as it becomes more affordable for buyers holding other currencies. With increased projections of rate cuts later in 2024, investing in gold becomes more attractive.

As the U.S. dollar weakens toward the end of 2024 and into 2025, the price of the yellow commodity may surge further. SPDR Gold Shares GLD, iShares Gold Trust IAU, abrdn Physical Gold Shares ETF SGOLand Goldman Sachs Physical Gold ETF AAAU can be considered.

Housing ETFs

With increasing expectations of interest rate cuts toward the end of the year, 2024 appears poised to provide a relief to the housing market. A decline in the Federal funds rate typically has an indirect impact on the mortgage rate. Industry experts are optimistic about mortgage rates trending favorably throughout the year.

Funds like iShares U.S. Home Construction ETF ITB, SPDR S&P Homebuilders ETF XHB, Invesco Building & Construction ETF PKB and Hoya Capital Housing ETF HOMZ can be considered.

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SPDR Gold Shares (GLD): ETF Research Reports

iShares Gold Trust (IAU): ETF Research Reports

abrdn Physical Gold Shares ETF (SGOL): ETF Research Reports

Invesco CurrencyShares British Pound Sterling Trust (FXB): ETF Research Reports

Invesco CurrencyShares Euro Trust (FXE): ETF Research Reports

iShares MSCI Emerging Markets ETF (EEM): ETF Research Reports

SPDR S&P Homebuilders ETF (XHB): ETF Research Reports

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

Invesco Building & Construction ETF (PKB): ETF Research Reports

Invesco DB US Dollar Index Bearish ETF (UDN): ETF Research Reports

iShares Core MSCI Emerging Markets ETF (IEMG): ETF Research Reports

Vanguard FTSE Emerging Markets ETF (VWO): ETF Research Reports

Invesco CurrencyShares Swiss Franc Trust (FXF): ETF Research Reports

Grayscale Bitcoin Trust ETF (GBTC): ETF Research Reports

SPDR Portfolio Emerging Markets ETF (SPEM): ETF Research Reports

Goldman Sachs Physical Gold ETF (AAAU): ETF Research Reports

Hoya Capital Housing ETF (HOMZ): ETF Research Reports

iShares Bitcoin Trust (IBIT): ETF Research Reports

Bitwise Bitcoin ETF (BITB): ETF Research Reports

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