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Wall Street rallied, buoyed by the first interest rate cut since 2020 to address slowing economic growth. The S&P 500 and the Dow Jones hit new all-time highs and topped 5,700 and 42,000 milestones, respectively, for the first time on Thursday. The S&P 500 and Dow Jones rose 1.7% and 1.3%, respectively. The Nasdaq Composite Index outperformed, rising 2.5%. 

Sector ETFs, which are the major beneficiaries of a rate cut, rallied to new 52-week highs. Some of these include SPDR S&P Telecom ETF (XTL - Free Report) , iShares U.S. Insurance ETF (IAK - Free Report) , AdvisorShares Restaurant ETF (EATZ - Free Report) , iShares U.S. Home Construction ETF (ITB - Free Report) and Industrial Select Sector SPDR (XLI - Free Report) .

In its meeting this week, the Fed slashed key interest rates by 50 bps to 4.75%-5% after holding it at a 23-year high for 14 consecutive months since July 2023. This shows the Fed’s greater confidence in the fact that inflation is moving sustainably toward the 2% target level. The move was intended to inject strong optimism that the rate cut will deliver a "soft landing" for the U.S. economy.

The central bank projects two more rate cuts of another 50 bps in its final two meetings this year, due in November and December. It indicates another 100-bps rate cut next year and 50-bps in 2026, which means four rate cuts in 2025 and two in 2026.

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

Rate Cuts a Boon

High-dividend-yield sectors such as utilities and real estate are the biggest beneficiaries of a rate cut, 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 activity by making mortgages more affordable. Additionally, securities in capital-intensive sectors like telecom benefit from lower rates. Businesses also face lower loan rates over time. 

Lower rates will also have a positive impact on consumer discretionary and financial services. Reduced borrowing costs can 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 potentially lead to increased consumer and business loan activity.

Moreover, 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.

ETFs Scaling New Highs

SPDR S&P Telecom ETF (XTL)  

SPDR S&P Telecom ETF provides exposure to the telecommunications segment and follows the S&P Telecom Select Industry Index. It holds 39 stocks in its basket, with communications equipment making up 50.6% of the assets, while alternative carriers and integrated telecommunication services round off the next two spots with double-digit exposure each. 

SPDR S&P Telecom ETF has amassed $97.3 million in its asset base and charges 35 bps in annual fees. It trades in a lower average daily volume of 11,000 shares and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Insurance ETF (IAK)  

With AUM of $751 million, iShares U.S. Insurance ETF offers exposure to U.S. companies that provide life, property and casualty, and full-line insurance. It tracks the Dow Jones U.S. Select Insurance Index and holds 52 securities in its basket. Property & casualty insurance accounts for the largest share at 73.2%, while life & health insurance rounds off the next spot with double-digit exposure. 

iShares U.S. Insurance ETF charges 39 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook.  

AdvisorShares Restaurant ETF (EATZ)

AdvisorShares Restaurant ETF is actively managed and the only fund investing exclusively in the restaurant and foodservice industry, including restaurants, bars, pubs, fast food, take-out facilities, food catering services and more. AdvisorShares Restaurant ETF holds 23 securities in its basket. 

AdvisorShares Restaurant ETF has gathered $3 million in its asset base. EATZ charges 1.01% as annual fees and trades in an average daily volume of 2,000 shares. 
  
iShares U.S. Home Construction ETF (ITB)  

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. 

With an AUM of $3.7 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks. The product charges 39 bps in annual fees and trades in a heavy volume of around 2 million shares a day, on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

Industrial Select Sector SPDR (XLI)

Industrial Select Sector SPDR targets the broad industrial sector and follows the Industrial Select Sector Index. XLI holds 78 stocks in its basket and is well spread out across sectors, with aerospace & defense, machinery, and ground transportation making up for a double-digit share each.

Industrial Select Sector SPDR is the most popular ETF with AUM of $19.8 billion and an average daily volume of around 8.5 million shares. It charges 9 bps in fees per year and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

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