5 ETFs to Benefit if Fed Cuts Rate in September

Markets are seeing growing odds of a September rate cut. The CME's FedWatch tool suggests an 87.4% probability of a 25-bps rate cut in September. The latest round of weak data and declining consumer activity reinforced expectations for monetary policy easing.

The economy added just 73,000 jobs in July, well below the 104,000 expected. Job gains for the prior two months were revised sharply lower by a combined 258,000, and the unemployment rate ticked up to 4.2%. Manufacturing activity contracted, factory hiring fell to its lowest level since 2020 and consumer confidence weakened. The sluggish performance in the services sector, coupled with a decline in new orders, further fueled concerns about a potential economic slowdown or even a recession. The combination of weak data has raised the odds of interest rate cuts in September (read: Healthcare: Winning Sector ETF Amid Soft U.S. July Jobs Report).

Further, President Trump’s nomination of Stephen Miran to the Federal Reserve Board has reinforced dovish market expectations. Analysts believe his appointment could tilt the board toward rate cuts. Notably, JPMorgan has shifted its forecast, now expecting the first cut in September, much ahead of December. It now projects four cuts in total through early 2026.

Low Rates: A Boon

Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market. 

In particular, high dividend-yield sectors, such as utilities and real estate, will be the biggest beneficiaries of the rate cuts, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. In real estate, lower rates can boost housing market activities by making mortgages more affordable. Securities in capital-intensive sectors like telecom will also benefit from lower rates. Businesses will face lower loan rates over time. 

Lower rates will have a positive impact on consumer discretionary and financial services. Reduced borrowing costs will lead to increased consumer spending for consumer discretionary sectors. In the financial sector, while lower rates can compress net interest margins for banks, they can also encourage lending and lead to increased consumer and business loan activity.

Small-caps are set to outperform in a lower-rate environment as these companies have higher levels of debt. Fed rate cuts tend to boost foreign capital inflows into emerging markets like India. As the outlook for India’s economy remains strong, rate cuts will boost foreign capital inflow, which can lead the market to new highs. Gold will also continue to shine as lower interest rates will increase the metal’s attractiveness (read: Gold Set to Shine Again: ETFs to Tap the Momentum).

Given this, we have highlighted ETFs from sectors that are set to explode following a rate cut.

ETFs to Gain

Vanguard Real Estate ETF (VNQ) 

Vanguard Real Estate ETF targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 155 stocks in its basket, with none accounting for more than 6.1% share. VNQ has key holdings in retail REITs, health care REITs, telecom tower REITs and industrial REITs with double-digit exposure each. Vanguard Real Estate ETF is the most popular and liquid ETF, with an AUM of $33.5 billion and an average daily volume of 3.7 million shares a day. It charges 13 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Utilities Select Sector SPDR (XLU) 

With an AUM of $21.2 billion, Utilities Select Sector SPDR seeks to provide exposure to companies from the electric utility, water utility, multi-utility, independent power and renewable electricity producers, and gas utility industries. It follows the Utilities Select Sector Index, holding 31 stocks in its basket. Utilities Select Sector SPDR charges 8 bps of annual fees and trades in an average daily volume of 13 million shares. It has a Zacks ETF Rank #2 (Buy) (read: Utilities Witness Longest Win Streak Since 2009: ETFs to Play). 

Consumer Discretionary Select Sector SPDR Fund (XLY) 

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 51 securities in its basket, with key holdings in hotels, restaurants and leisure, broadline retail, specialty retail, and automobiles, with a double-digit allocation each. Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with an AUM of $22.3 billion and an average daily volume of around 5 million shares. It charges 8 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $60.4 billion and an average daily volume of 36 million shares. iShares Russell 2000 ETF holds well-diversified 1,979 stocks in its basket and has key holdings in financials, industrials, healthcare, and information technology. iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.

SPDR Gold Trust ETF (GLD)

SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with an AUM of $104 billion and a heavy volume of about 10 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3.
 

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