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With rate cuts likely coming this week, and continuing into the foreseeable future, three iShares ETFs stand to benefit the most.

Investors are expecting the Federal Open Market Committee (FOMC) to cut interest rates this week when it meets September 17 and 18.

While there is some debate about whether it will be a 50-basis point or 25-basis point cut, the longer-term view is that there will be multiple rate cuts through 2026.

According to the Fed’s latest Summary of Projections, or dot plot, the federal funds rate will be 4.75% to 5% at the end of 2024, 4% to 4.25% by the end of 2025, and 3% to 3.25% by the end of 2026. These projections could certainly change when the next dot pot comes out in October.

To prepare your portfolios for this new declining interest rate environment, consider three iShares ETFs that stand to benefit from the changes.

1. iShares U.S. Tech Independence Focused ETF

Typically, technology stocks and ETFs perform well in lower interest rate environments, because, for one reason, it is cheaper to borrow money and invest in future growth. This cycle has been a bit different, however, as large technology companies have generated huge profits in the high-rate environment, and their valuations have soared.

But the U.S. Tech Independence Focused ETF (NYSEARCA: IETC) is a little different than most as it is actively managed, meaning, it has a team of portfolio managers picking the best technology stocks using a proprietary process. The portfolio managers also select tech stocks from the entire universe, including large, mid, and small caps, which allows them to focus on the best opportunities and not just overpriced large caps.

The system focuses on stocks with a greater proportion of technological capabilities, revenues, and production in the U.S. and select global markets. It is also diversified, not just by cap size, but through the various segments of the tech sector, as the proprietary process categorizes stocks to one or more of 12 defined sectors.

The ETF is up 23% year-to-date and has a five-year annualized return of 21.95%. It has a median price target of $88 per share, which would suggest it has about 14% upside. But the advantage of this ETF is it is actively managed, with a good track record, so it can better navigate the changing environment.

2. iShares Russell 2000 Growth ETF

The investment type that stands to gain the most from rate cuts is small cap stocks and ETFs, and more specifically, small cap growth stocks.

Unlike their large cap counterparts, small cap growth stocks and ETFs have struggled in the high-interest-rate environment, as the higher cost of borrowing has curtailed investments in future growth, taken a bite out of profits, or both. Small companies typically don’t have the free cash flow or earnings to fund investments, particularly at the higher rates.

But as rates start to come down, small cap growth stocks and ETFs should benefit. A great option is the iShares Russell 2000 Growth ETF (NYSEARCA: IWO). This ETF tracks the Russell 2000 Growth Index, which includes more than 1,100 small cap growth stocks that are expected to grow at an above average rate. So it is broadly diversified, with the current largest holding, Vaxcyte (Nasdaq: PCVX) making up just 1% of the portfolio.

The ETF is up 10.2% YTD but has a five-year annualized return of 6.1%. Analysts see strong growth for this ETF, with a median 12-month price target of $344 per share, which would be a 22% increase over the current share price.

3. iShares S&P Small Cap 600 Growth ETF

For mostly the same reasons as the iShares Russell 2000 Growth ETF, the iShares S&P Small Cap 600 Growth ETF (Nasdaq: IJT) is well-positioned to generate returns for investors over the next couple of years.

This fund is different from the above-mentioned ETF in that it is more concentrated, tracking the S&P 600 Growth Index, which includes about 371 small cap growth-oriented stocks within the S&P 600.

To meet the criteria for inclusion, stocks in this ETF must have a three-year change in earnings per share over price per share, three-year sales-per-share growth rate, and momentum based on a 12-month percentage share price change.

So, while it is focused on small cap growth, the criteria is more focused on earnings and sales growth, as well as liquidity, zeroing in on more stable small caps, as opposed to the Russell 2000 Growth ETF, which may have more high fliers, but be more volatile.

Currently, the top three holdings in this ETF are Ensign Group (Nasdaq: ENSG), Fabrinet (NYSE: FN), and Mueller Industries (NYSE: MLI).

The ETF is up 9% YTD and has a five-year annualized return of 8.1%. Analysts give it a median price target of $128 per share, suggesting there is 10% growth upside over the next 12 months.

While the first rate cut is expected to come as soon as this week, these ETFs are poised to benefit from the expected longer term drop in rates.  

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