"At Least 3 Rate Cuts" by December? Sector ETFs to Play
Now that coronavirus fears have gripped global markets, investors are expecting the Fed to cut rates. A Fed official says the coronavirus economic fallout ‘could spill over’, while Fed vice chairman Richard Clarida indicated that officials won’t rush to cut interest rates to make up for the virus impact.
At the current level, according to CME FedWatch tool, there is a 98% probability for monetary policy easing by December 2020. The highest probability (30.9%) goes for a 75-bp cut by December, 25.7% chance of a 50-bp rate cut by the year-end and 20.9% possibility of a 100-bp slash. The chance of keeping the rate same is just 2% (read: Global Bond ETFs in a Sweet Spot on Coronavirus Scare).
Some analysts are also pointing at the growing chances of multiple Fed rate cuts this year. If this happens, U.S. treasury yields will be on a downtrend with short-term yields getting impacted more. In any case, flight-to-safety trade dragged down the benchmark U.S. treasury yield to as low as 1.33%. Against this low-rate environment, investors can bet on the following sector ETFs.
Utilities – Vanguard Utilities ETF VPU
Utilities is a rate-sensitive sector which tends to perform well in a declining-rate environment. The underlying MSCI US Investable Market Utilities 25/50 Index of the fund comprises stocks of large, mid, and small-size U.S. companies within the utilities sector. It yields 2.70% annually. The fund has a Zacks Rank #2 (Buy) (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).
Mortgage REIT – VanEck Vectors Mortgage REIT Income ETF MORT
The underlying MVIS US Mortgage REITs Index tracks the overall performance of mortgage real estate investment trusts. The Zacks Rank #2 fund charges 7.17% annually and charges 42 bps in fees (read: Looking to Buy the Dip? Play These Top-Ranked ETFs).
Staples – Consumer Staples Select Sector SPDR ETF XLP
Still-low inflation level, cheap oil and poor U.S. consumer sentiment in February may turn Americans toward staples stocks from discretionary ones in the near term. The defensive nature of the sector should also support it during any downturn. The fund yields 2.61% and charges 13 bps in fees (read: Walmart Disappoints: ETFs in Focus).
Financials – Financial Select Sector SPDR ETF XLF
This pick is a bit surprising. But we would like to note that financial stocks are pretty beaten-down in the past year due to the flattening yield curve. Some parts of the yield curve has inverted now. Notably, as of Feb 26, the spread between 10-year and one-month yields was negative 34 bps in fees.
If the Fed cut short-term rates multiple times this year, we may end up seeing steepening of the yield curve in the medium term. This could prove beneficial for financial stocks. Moreover, investors should note that bank stocks have cheaper valuation at the current level and offer a good entry point (read: Why Bank ETFs May Soar in 2020).
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Financial Select Sector SPDR ETF (XLF): ETF Research Reports
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
Vanguard Utilities ETF (VPU): ETF Research Reports
VanEck Vectors Mortgage REIT Income ETF (MORT): ETF Research Reports
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