As widely expected, the Federal Reserve cut interest rates by 25 bps to 2-2.5% in its policy meeting that ended on Jul 31 for the first time since the 2008 financial crisis. It also plans to end its process of shrinking the $3.8 trillion balance sheet, two months ahead of schedule.
The easy money policies came amid the trade war, global slowdown threats and low inflation in the United States. However, the American economy is still strong with rising consumer confidence and spending as well as near 50-year low unemployment. However, manufacturing activities have slowed down while business investments have become muted (read: Fed Likely to Cut Rates: ETFs to Gain or Lose (revised)).
Additionally, the Fed also signaled future rate cuts, citing that it will “act as appropriate to sustain the expansion.” However, it also said that the move is not the start of a lengthy series of rate cuts. This mixed message triggered a sharp fall in the stock market.
Rate Cut a Boon
In a lower-rate environment, high-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. Additionally, securities in capital-intensive sectors like telecom would also be benefited by lower rates. Further, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and rise in economic activities. This will in turn increase profitability across various segments. Businesses will also face lower loan rates over time.
Meanwhile, gold mining stocks will also get a boost given that these are leveraged plays on the underlying metal. The dual tailwinds of easing policies and flight to safety amid geopolitical tensions and global growth worries will raise the appeal for gold, pushing prices higher.
Given this, we have highlighted ETFs & stocks from sectors that are expected to skyrocket on lower rates.
Schwab U.S. REIT ETF SCHH, having AUM of $5.7 billion and average daily trading volume of 695,000 shares, offers broad exposure to the real estate sector. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Unbeatable ETF Strategies for 2nd Half).
With market cap of $29.4 billion, AvalonBay Communities Inc. AVB is an equity REIT, which has a long record of developing, redeveloping, acquiring and managing distinctive apartment homes in some of the best U.S. markets. This Zacks Rank #2 (Buy) stock is expected to post earnings increase of 3.78% for this year.
Zacks #3 Ranked Utilities Select Sector SPDR XLU provides exposure to companies from the electric utility, gas utility, multi-utility, and independent power producer and energy trader industries. It has amassed $10.1 billion in its asset base and trades in volume of 16.2 million shares per day on average (read: Sector ETFs & Stocks to Bet On This Earnings Season).
American Water Works Company Inc. AWK, a provider of water and wastewater services in the United States and Canada, is expected to post earnings growth of 9.1% for this year. It has a Zacks Rank #2 and market cap of $20.8 billion.
SPDR S&P Homebuilders ETF XHB provides exposure to the homebuilders segment with a well-diversified exposure across building products, home furnishings, home improvement retail, homefurnishing retail and household appliances. It is the most popular option in the homebuilding space with AUM of $621.7 million and average daily volume of 2.6 million shares. It has a Zacks ETF Rank #3 (read: Housing ETFs to Buy on D.R. Horton Beat & Likely Fed Rate Cut).
TopBuild Corp. BLD is engaged in the installation and distribution of insulation and other building products to the U.S. construction industry. It is expected to see earnings growth of 21.7% for this year and sports a Zacks ETF Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
VanEck Vectors Gold Miners ETF GDX is the most popular and actively traded gold miner ETF with AUM of $11.3 billion and average daily volume of around 45 million shares. Canadian firms account for half of the portfolio, while the United States (17.9%) and Australia (17.3%) round off the top three. The fund charges 52 bps in annual fees.
With a market cap of $29.8 billion, Barrick Gold Corporation GOLD has mining operations and projects in 15 countries, including Argentina, Australia, Canada, Chile, Côte d’Ivoire, Democratic Republic of Congo, Dominican Republic, Mali, Papua New Guinea, Peru, Saudi Arabia, Senegal, United States and Zambia. The stock is expected to see earnings growth of 25.7% year over year this year and has a Zacks Rank #2 (read: Gold Mining ETFs: What You Need to Know).
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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
TopBuild Corp. (BLD) : Free Stock Analysis Report
VanEck Vectors Gold Miners ETF (GDX): ETF Research Reports
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
Schwab U.S. REIT ETF (SCHH): ETF Research Reports
Utilities Select Sector SPDR Fund (XLU): ETF Research Reports
Barrick Gold Corporation (GOLD) : Free Stock Analysis Report
AvalonBay Communities, Inc. (AVB) : Free Stock Analysis Report
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