ETFs To Play As Fed Surprises With A Rate Cut

Taking investors by a surprise, the U.S. Federal Reserve slashed interest rates on Mar 3 in order to combat the aggravating coronavirus. The rates were cut by a half percentage point to a target range of 1.00% to 1.25%. Highlighting the severity of the situation, the rate cut happened for the first time outside of a scheduled policy meeting since 2008. But the policymakers at the Fed maintained confidence in the strength of the U.S. economy. However, in spite of the move, all three major U.S. stock market indices ended the day by declining around 3%. However, market participants are rooting for another rate cut by June.

The spike in the number of infected cases outside mainland China has made the outbreak a serious threat to global economic growth and corporate earnings. The manufacturers are having to struggle with disturbed supply chains and logistics. Analysts assume that decline in China’s domestic consumption level will adversely impact the companies belonging to the transport groups, hospitality chains, airlines, luxury goods makers and retailers. For instance, the trade body for the global airline industry — International Air Transport Association — believes that waning passenger demand due to the coronavirus epidemic will result in a $29.3-billion revenue decline in the airline industry this year (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).

The easing monetary policies can help credit markets by lowering borrowing costs. But the disturbed supply chains and travel bans can be mended only by containing the virus. However, the outbreak is showing no signs of slowing down yet. The virus has now spread to around 81 countries and territories around the world, claiming 3,203 lives along with 93,198 confirmed cases. In fact, the virus crisis had led to one of the worst global stock market rout weeks (ending on Feb 28) since the financial crisis in 2008.

Given the situation, let’s look at some ETF areas that investors can follow for a smooth sail in these turbulent times.

Dividend ETFs

In a low-interest rate environment, dividend investing becomes a hot spot. Against this backdrop, dividend ETFs like WisdomTree U.S. Quality Dividend Growth Fund DGRW, FlexShares Quality Dividend Defensive Index Fund QDEF, WBI Power Factor High Dividend ETF WBIY and Schwab US Dividend Equity ETF SCHD might be compelling picks (read: 7 Dividend ETFs That Offer Growth in 2020).

Utility ETFs

The instability in the financial markets coupled with the rate cuts will continue to drive the utility sector. The sector is among the most stable for the long term as its players are likely to offer decent returns, irrespective of market conditions. It is known for its non-cyclical nature and acts as a safe haven for investors during choppy stock-market conditions. Furthermore, utilities act as a defensive option to stay invested in more rewarding equity markets. In view of this, investors can consider The Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU, iShares U.S. Utilities ETF IDU and Fidelity MSCI Utilities Index ETF FUTY (read: ETFs to Buy as Utilities Are Favored Amid Virus Scare).

Gold ETFs

Gold, which has gained momentum lately on high safe-haven demand, will continue to shine as lower interest rates will increase the metal’s attractiveness. Moreover, interest rate cuts are lowering the opportunity cost of investing in non-yielding bullion. Notably, gold ETFs mostly move in tandem with the metal’s price. Therefore, investors can consider SPDR Gold Shares (NYSE:GLD) (TSXV:GLD) , iShares Gold Trust IAU, SPDR Gold MiniShares Trust (TSXV:GLD) and GraniteShares Gold Trust (TSX:BAR) to gain from the current scenario (read: ETFs to Play as Goldman Forecasts Gold to Hit $1800).

REIT ETFs

Real estate investment trusts (REITs) have had a good run on the bourses in 2019. A dovish Fed can be cited as the main driving factor. When interest rates drop, mortgage rates fall, making real estate or refinancing mortgages affordable. This in turn boosts real estate sales. These funds offer outsized yields and act as good investing options when increased safe-haven trades keep yields at check. In view of this, investors can consider ETFs like JPMorgan (NYSE:JPM) BetaBuilders MSCI US REIT ETF BBRE, iShares Core U.S. REIT ETF USRT, Nuveen Short-Term REIT ETF NURE, Invesco S&P 500 Equal Weight Real Estate ETF EWRE and Schwab U.S. REIT ETF SCHH (read: REIT ETFs to Gain as Mortgage Rates Dip to 3.5-Year Low).

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