In a significant move, the Federal Reserve has slashed interest rates for the first time since 2020, signaling a shift in its monetary policy approach. The central bank cut rates by 50 basis points (bps) to 4.75%-5%, after holding them at a 23-year high for 14 consecutive months since July 2023. This move indicates a greater confidence in the Fed’s ability to bring inflation down sustainably towards its 2% target. The goal is to support a stable economic environment without triggering a recession or a significant rise in unemployment.
The Fed’s projections indicate further rate cuts are expected. The central bank anticipates two more cuts of another 50 bps by the end of this year, with its final two meetings scheduled for November and December. Looking further ahead, the Fed projects a 100 bps rate cut next year and a 50 bps cut in 2026. This translates to four more rate cuts in 2025 and two in 2026.
Lower interest rates typically translate to reduced borrowing costs, which can stimulate economic growth. This can positively impact sectors like real estate, consumer discretionary, and financial services, which are particularly sensitive to interest rate changes.
In real estate, for example, lower rates can make mortgages more affordable, boosting housing market activity. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates might compress net interest margins for banks, they can also encourage lending, potentially leading to increased consumer and business loan activity.
Investors could see an opportunity for a short-term bullish play on rate-sensitive sectors, as these areas are likely to experience significant gains in the wake of rate cuts. While futures or long-stock approaches are possibilities, leveraged ETFs might be a good option. Leveraged ETFs offer exposure that is a multiple (2 or 3 times) of the performance of the underlying sector using various investment strategies such as swaps, futures contracts, and other derivative instruments.
It’s important to note that, as most of these funds aim to achieve their goal on a daily basis, their performance can vary significantly from the inverse performance of the underlying index or benchmark over a longer period compared to a shorter period (such as weeks, months, or a year) due to the compounding effect. However, these funds provide a more cost-effective alternative than directly going long or utilizing futures contracts.
For investors seeking to capitalize on the steady/declining rate scenario in a short span, consider the following ETFs, given the bullish outlook for the sectors:
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ProShares Ultra Real Estate (URE):
This fund seeks to deliver two times the daily performance of the S&P Real Estate Select Sector Index. It has an AUM of $86.5 million and charges 95 bps in annual fees.*
Direxion Daily MSCI Real Estate Bull 3X Shares (DRN):
This product aims to deliver three times the performance of the Real Estate Select Sector Index. It has an AUM of $120.6 million and charges 95 bps in annual fees.*
Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL):
Providing leveraged exposure to homebuilders, this ETF creates a three-time long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 93 bps and has accumulated $369.3 million in its asset base.*
Direxion Daily Consumer Discretionary Bull 3X Shares (WANT):
Offering leveraged exposure to the consumer discretionary sector, this ETF provides three times exposure to the Consumer Discretionary Select Sector Index. It has an AUM of $25.3 million and charges 95 bps in annual fees.*
