As the Federal Reserve signals its intention to cut interest rates once inflation has cooled, investors are seeking out investments that thrive in this environment. Many exchange-traded funds (ETFs) perform well in low interest rate scenarios, making it an attractive time for income investors to enter the market.
Here are some ETF options that may respond positively to declining interest rates and what you should know about them.
Which investments excel in a low-rate environment?
An ETF’s performance is dependent on its underlying assets. Assets that generate cash flow, particularly with fixed payouts, tend to perform well when interest rates are falling. Here are some assets that typically thrive in a low-rate environment:
- Bonds: Long-term bonds are heavily influenced by changes in interest rates, with their prices being most affected by rate fluctuations.
- Preferred stocks: Similar to bonds, preferred stocks offer fixed returns and react to shifts in interest rates.
- Dividend stocks: Stocks that pay regular dividends become more attractive as rates decline, especially if the dividend payout increases over time.
- Real estate investment trusts (REITs): REITs benefit from lower interest rates as they experience a rise in property value and can borrow money at cheaper rates.
It’s important to note that the relationship between falling interest rates and rising asset prices is not absolute. While falling rates may coincide with the early stages of a recession, investing in these assets can help mitigate the impact of a downturn.
Despite the potential benefits, falling rates may not shield dividend stocks from a market downturn. However, if rates decline as part of a controlled economic slowdown, the stock market as a whole may rally.
Investors have already factored in these scenarios since the Fed hinted at rate cuts, causing prices of assets like bonds and preferred stocks to rebound.
Top ETFs for declining rates
Here are some ETFs that stand out based on their holdings, returns, and expense ratios:
iShares 20+ Year Treasury Bond ETF (TLT)
This fund focuses on long-dated U.S. Treasury bonds, making it highly responsive to rate changes.
Why it may perform well: TLT is likely to increase in value as rates decline, but could decrease if rates rise.
Expense ratio: 0.15 percent
Goldman Sachs Access Treasury 0-1 Year ETF (GBIL)
This fund holds short-term U.S. Treasurys, offering high yields based on current interest rates.
Why it may perform well: GBIL provides stable yields without significant principal risk, making it a reliable investment in a low-rate environment.
Expense ratio: 0.12 percent
Key Takeaways
ETFs present a convenient way to capitalize on trends like declining interest rates, providing diversified exposure without extensive research. Utilizing reliable stock trading platforms can assist in navigating the ETF landscape with robust research capabilities.
Editorial Disclaimer: Investors are encouraged to conduct thorough research on investment strategies before making decisions. Past performance does not guarantee future results in investment products.