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Sector ETFs, Stocks Set to Explode After Another Rate Cut

Sweta Killa

The Federal Reserve slashed interest rates for the second time since the financial crisis by 25 basis points (bps) to 1.75-2% in its policy meeting to sustain a decade-long economic expansion. The central bank gave few hints over the path of the future rates.

Though the U.S. economy is growing at a "moderate" rate and the labor market "remains strong," the Fed said that it is cutting rates "in light of the implications of global developments for the economic outlook as well as muted inflation pressures." Further, it pledged to "act as appropriate" to sustain the expansion. Seven of 17 policymakers projected one more quarter-point rate cut in 2019 (read: 5 ETF Zones to Watch Ahead of Fed Meeting).

In addition to a short-term rate cut, the Fed lowered the interest it pays on excess reserves by 30 bps. The move was aimed at keeping the funds rate within its target range. The interest on excessive reserves historically has acted as a guardrail for the funds rate, which traded 5 bps above the target.

A Boon for Sectors

In a lower-rate environment, high-dividend-yield sectors such as utilities and real estate will be the biggest beneficiaries given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. Additionally, securities in capital-intensive sectors like telecom would also benefit from lower rates. Further, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and rise in economic activities. This will, in turn, increase profitability across various segments. Businesses will also face lower loan rates over time.

Meanwhile, gold mining stocks will also get a boost given that these are leveraged plays on the underlying metal. The dual tailwinds of easing policies and flight to safety amid geopolitical tensions and global growth worries will raise the appeal for gold, pushing prices higher (read: High-Yield ETFs at a 52-Week High Ahead of Fed's Decision).

Given this, we have highlighted ETFs & stocks from sectors that are set to explode on lower rates.

Real Estate

Vanguard Real Estate ETF VNQ, having AUM of $36.5 billion and average daily trading volume of 5.1 million shares, offers broad exposure to the real estate sector. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Here's Why So Many Real Estate ETFs Near 52-Week High).

With market cap of $18.1 billion, CBRE Group, Inc. CBRE operates as a commercial real estate services and investment company worldwide. This Zacks Rank #2 (Buy) stock is expected to post earnings increase of 14.33% for this year.

Utilities

Zacks #3 Ranked Utilities Select Sector SPDR XLU provides exposure to companies from the electric utility, gas utility, multi-utility, and independent power producer and energy trader industries. It has amassed $10.9 billion in its asset base and trades in volume of 17.3 million shares per day on average (read: Guide to 25 Most-Liquid ETFs).

NRG Energy Inc. NRG, a leading integrated power company in the United States, is expected to post earnings growth of 61.4% for this year. It has a Zacks Rank #2 and market cap of $9.87 billion.

Homebuilders

SPDR S&P Homebuilders ETF XHB provides exposure to the homebuilders segment with a well-diversified exposure across building products, home furnishings, home improvement retail, homefurnishing retail and household appliances. It is the most popular option in the homebuilding space with AUM of $668.5 million and average daily volume of 2.3 million shares. It has a Zacks ETF Rank #3.

With market cap of $1 billion, M/I Homes Inc. MHO is one of nation's leading builders of single-family homes. It is expected to see earnings growth of 15.17% for this year and sports a Zacks ETF Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Gold Mining

VanEck Vectors Gold Miners ETF GDX is the most popular and actively traded gold miner ETF with AUM of $11.6 billion and average daily volume of around 51.6 million shares. Canadian firms account for half of the portfolio, while the United States (17.1%) and Australia (15.7%) round off the top three. The fund charges 52 bps in annual fees.

AngloGold Ashanti Limited AU is the third-largest gold mining company in the world, measured by production. With a market cap of $8.2 billion, the stock is expected to see earnings growth of 154.7% year over year this year and sports a Zacks Rank #1 (read: 5 Gold Mining ETFs & Stocks Shining in August).

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