5 ETFs Primed to Soar if the Fed Cuts Rates in December

Expectations for a December rate cut from the U.S. Federal Reserve have intensified, with major banks and market participants increasingly viewing it as the most likely scenario. J.P. Morgan recently reversed its stance, now predicting a 25-basis-point cut in December after previously forecasting that policymakers would wait until January (as reported by Reuters). 

This pivot follows remarks from key Fed officials indicating growing openness to an earlier move, alongside weak payroll and inflation data. In line with this, the CME FedWatch tool shows traders are pricing in an 85% probability of a quarter-point reduction in December.

While inflation has shown some signs of easing, lately, a cooling labor market, evidenced by the slip in employment data and companies limiting headcounts through hiring freezes, is increasing the pressure on policymakers to stimulate growth. A rate cut has thus become imminent to guard against a sharper economic downturn and support the labor market. This dynamic is setting the stage for significant market movements, making certain Exchange-Traded Funds (ETFs) particularly attractive.

Before suggesting a few ETFs that you may consider adding to your portfolio to capture potential gains following a rate cut, let us briefly discuss the sectors that are likely to gain when interest rates decline.

Sectors Poised to Benefit From Lower Rates

An interest rate cut generally lowers borrowing costs across the economy, which in turn stimulates growth and makes stocks more appealing relative to fixed-income investments.

•    Technology Stocks: Companies with high growth potential, especially in the technology sector, heavily rely on future earnings. Lower rates increase the present value of those future profits, significantly boosting their current valuation. 

•    Small-Cap Stocks: These smaller companies are typically more sensitive to domestic economic conditions and often rely more on debt for expansion than large, established firms. Lower interest rates reduce their debt servicing costs and increase their access to affordable capital, making them prime beneficiaries of a dovish monetary policy.

•    Financials: In the financial sector, banks with diversified operations may see improved loan activity due to lower rates.

•    Consumer Discretionary & Utilities: Lower interest rates boost consumer credit access and spending power, thereby bolstering the profit margins of companies from the consumer discretionary industry. On the other hand, the Utilities sector, being capital-intensive, also benefits from reduced financing costs when interest rates fall.

ETFs to Soar

With consensus building around a December rate cut and several sectors poised to benefit, investors may consider adding targeted ETFs in financials, consumer discretionary, utilities, and technology to their watchlist — and potentially invest if they see fit. The next section will focus on ETFs from these industries, as well as a small-cap ETF well-positioned for gains if the Fed delivers a cut next month.

Technology Select Sector SPDR ETF XLK

This fund, with assets under management (AUM) worth $91.47 billion, offers exposure to 70 companies from technology hardware, storage and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment, instruments and components industries. Its top five holdings include tech giants — Nvidia (14.24%), Apple (13.49%), Microsoft (11.64%), Broadcom (5.94%) and Palantir (3.41%). 

XLK has soared 22.6% year to date. The fund charges 8 basis points (bps) as fees. It traded at a good volume of 6.7 million in the last trading session.

iShares Russell 2000 ETF IWM

This fund, with assets worth $71.69 billion, provides exposure to 1,958 small-cap U.S. companies. Its top five holdings include Credo Technology (0.84%), Bloom Energy (0.75%), Fabrinet (0.56%), Nextpower Inc. (0.46%) and IQNQ Inc. (0.45%). 

IWM has gained 12.8% year to date. The fund charges 19 bps as fees. It traded at a good volume of 34.6 million in the last trading session.

Financial Select Sector SPDR ETF XLF

This fund, with AUM worth $51.45 billion, offers exposure to 75 companies in the financial services; insurance; banks; capital markets; mortgage real estate investment trusts (REITs); and consumer finance. Its top five holdings include mega banks Berkshire Hathaway (12.39%), JP Morgan Chase (11.07%), Visa Inc. (7.55%), Mastercard (5.99%) and Bank of America (4.75%). 

XLF has risen 10.7 % year to date. The fund charges 8 bps as fees. It traded at a good volume of 35.2 million in the last trading session.

Consumer Discretionary Select Sector SPDR ETF XLY

This fund, with AUM worth $23 billion, offers exposure to 49 companies in specialty retail; broadline retail; hotels, restaurants and leisure; textiles, apparel and luxury goods; household durables; automobiles; automobile components; distributors; leisure products; and diversified consumer services. Its top five holdings include Amazon (22.88%), Tesla (20.02%), Home Depot (5.94%), McDonald (4.56%) and TJX Companies (4.09%). 

XLY has gained 5.4% year to date. The fund charges 8 bps as fees. It traded at a good volume of 4.1 million in the last trading session.

Utilities Select Sector SPDR ETF XLU

This fund, with AUM worth $22.07 billion, offers exposure to 31 companies from the electric utilities; water utilities; multi-utilities, independent power and renewable electricity producers; and gas utility industries. Its top five holdings include utility giants: NextEra Energy (12.75%), Constellation Energy (8.12%), Southern Company (7.18%), Duke Energy (6.95%) and American Electric Power (4.75%).

XLU has surged 21.4% year to date. The fund charges 8 bps as fees. It traded at a good volume of 8.4 million in the last trading session.  
 

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