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The Federal Reserve’s year-end decision to cut interest rates by 25 basis points (0.25%), the third rate trim of 2025, marked a bid to further stimulate borrowing and investment amid a complex and shifting economic environment. While some of the usual impacts of a rate cut have yet to materialize—10-year Treasury yields have so far stayed unusually high, for example—other corners of the market should provide more predictable opportunities for investors.
If the thought of targeting individual assets with the potential to benefit from a lower federal funds rate seems too risky given broader uncertainties, consider an exchange-traded fund (ETF) that could be well-positioned to thrive in this environment. A number of funds, including dividend stocks, real estate sector securities, and corporate bonds, could see success heading into the new year.
1. Broad Dividend Fund to Capitalize on Rate Boost
Dividend stocks could do well in a low-rate setting, in part because many of the most popular dividend payers are in debt-focused industries like telecommunications, infrastructure, and utilities. When rates are down and loans are cheaper, these companies have lower debt servicing costs and can thus be more profitable. Share prices in these industries often rise in low-rate environments as well.
The Vanguard High Dividend Yield Index Fund (NYSE:VYM) is a fund focused on companies that already have high dividend yields, including stalwarts of a dividend investor’s portfolio such as Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO). VYM pays out a dividend yield of 2.43%, making it an attractive passive income fund for investors even without considering a boost from lower interest rates.
The fund’s combination of low fees (it has an expense ratio of just 0.06%), strong asset base and liquidity, and performance make it a great choice for investors seeking a broad dividend play while rates are down. VYM has returned nearly 17% year-to-date (YTD), beating the S&P 500.
2. Excellent Real Estate Dividends for a Modest Fee
The Vanguard Real Estate ETF (NYSE:VNQ) explores a different sector that can benefit from low rates: real estate. Cheaper borrowing means more flexibility for real estate purchases and lower costs on existing debt. Lower interest rates can also stimulate demand, and real estate investment trusts (REITs) can be a refuge for investors when other parts of the market are turbulent.
VNQ holds a basket of over 150 companies in the real estate sector, with a primary focus on REITs across industries. Because real estate firms tend to pay out substantial dividends, VNQ offers a compelling dividend yield of 3.94%. This may be an attractive passive income stream for a relatively modest expense ratio of 0.13%. VNQ is also highly liquid, with a one-month average trading volume near 4 million.
VNQ may be most appealing as a dividend play, as the fund’s capital appreciation is not as competitive. It has returned under 4% YTD. As a way of generating passive income with broad exposure to the real estate market, however, VNQ is tough to beat.
3. Medium-Term Corporate Bonds Could Be the Sweet Spot of the Bond Market
An adage of investing says that lower interest rates mean higher bond prices, and corporate bonds can outperform Treasurys thanks to their dominant yields in these settings. While defensive investors might normally shy away from corporate bonds for the higher credit risk they carry, tighter credit spreads can lower the risk of default.
The Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) takes a middle-of-the-road approach to corporate bonds with regard to maturity, seeking out investment-grade bonds with a dollar-weighted average maturity of between five and 10 years. Like VNQ above, the strength of VCIT is its dividends, and the fund offers an impressive yield of 4.58% for strong passive income potential. It achieves this with an ultra-low expense ratio of just 0.03%, making this a compelling prospect even when interest rates are not favorable.
In a strong interest rate environment, however, VCIT can also achieve more impressive price performance. Indeed, the fund has risen by about 9% YTD. While this will not rival the broader market, it is icing on the cake for investors looking primarily for a passive income source.