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The latest data on job openings renewed concerns over the economy's health, bolstering expectations of a supersized rate cut from the Fed this month. Traders are now pricing in a nearly 50% chance of the Federal Reserve slashing interest rates by 50 bps by the end of its September meeting, up from a 38% chance the day prior, per the CME FedWatch Tool.

The latest Job Openings and Labor Turnover Survey showed that job openings dropped to the lowest level since January 2021 in July, indicating that the labor market is losing steam. This week’s ISM manufacturing survey also came weaker. As such, investors are ramping up rate-cut bets.

A Boon for Sectors
 

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. 

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 activity by making mortgages more affordable. Additionally, securities in capital-intensive sectors like telecom will also benefit from lower rates. Businesses will 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.

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

ETFs to Gain
 

Utilities Select Sector SPDR (XLU - Free Report)

With AUM of $17.2 billion, Utilities Select Sector SPDR provides exposure to a small basket of 31 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm at 14.2%, while other firms hold no more than 8.4% share. Electric utilities takes the top spot in terms of sectors at 66.1%, closely followed by multi utilities (26.6%). 

Utilities Select Sector SPDR charges 9 bps in annual fees and sees a heavy volume of around 9 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Vanguard Real Estate ETF (VNQ - Free Report)  

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 13.4% share. VNQ has key holdings in retail REITs, telecom tower REITs and industrial REITs with double-digit exposure each. 

Vanguard Real Estate ETF is the most popular and liquid ETF, with AUM of $35.4 billion and an average daily volume of around 3.5 million shares a day. It charges 13 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB - Free Report) 

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 $3.2 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks, with a heavy concentration on the top two firms. 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 with a High risk outlook.

Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report)  

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 52 securities in its basket, with key holdings in specialty retail, hotels, restaurants and leisure, broadline 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 AUM of $19 billion and an average daily volume of around 3 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

SPDR Gold Trust ETF (GLD - Free Report)

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 AUM of $70 billion and a heavy volume of about 6 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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