Sector ETFs & Stocks to Buy or Avoid Post Fed Meeting

In its latest FOMC meeting that concluded yesterday, the Fed left interest rates unchanged as widely expected within its target range of 2.25-2.5% but hinted at future rate cuts, if needed, to protect the economy from trade conflicts and other threats.

The central bank has dropped the word “patient” in favor of language promising to “closely monitor the implications of incoming information for the economic outlook.” Fed also said that it would "act as appropriate to sustain the expansion” because "uncertainties" have increased (read: Best June for Stocks in Decades: 5 Best ETFs).

A survey of the 17 Fed officials showed that nearly half expect at least one rate cut this year, with seven projecting two cuts. According to the CME FedWatch tool, chances for a cut at the Fed's July meeting rose to 100% compared with 84% before the meeting concludes. Fed funds futures also show a 100% chance of at least a 25-bps rate cut at the Fed’s July meeting. Futures also show 80% odds of rates being cut by 50 bps between now and September.

Rate Cuts: Boon and Bane

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 be benefited by 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 (read: ETF Strategies to Follow If Fed Cuts Rate).

However, decline in rates will weigh on the U.S. dollar against the basket of other currencies, thereby pulling out capital from the country. Sectors like financials, industrials, technology and consumer discretionary will be severely impacted. In fact, banks are in the most disadvantageous position as they seek to borrow money at short-term rates and lend at long-term rates. If interest rates drop, banks would be able to earn less on lending and pay higher on deposits. This would compress net margins and banks’ profits. Also, insurance companies are able to earn lower returns on their investment portfolio of longer-duration bonds.

Given this, we have highlighted ETFs & stocks from sectors that will benefit from lower rates and some that will be badly impacted.

Sectors to Buy

Real Estate

Schwab U.S. REIT ETF SCHH, having AUM of $5.6 billion and average daily trading volume of 883,000 shares, offers broad exposure to the real estate sector. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

With market cap of $13.8 billion, Host Hotels & Resorts Inc. HST is the largest lodging real estate investment trust (REIT) and one of the largest owners of luxury and upper-upscale hotels. This #2 (Buy) Ranked stock is expected to post earnings decline of 2.82% for this year.

Utilities

This 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 $9.9 billion in its asset base and trades in volume of 17.8 million shares per day on average (read: ETFs Set to Soar on Rate Cuts Signal).

Brookfield Renewable Partners L.P. BEP, an operator of renewable power platform, is expected to post earnings growth of 261.5% for this year. It has a Zacks Rank #2 and a market cap of $6.1 billion.

Consumer Staples

Vanguard Consumer Staples ETF VDC, carrying a Zacks ETF Rank #3, offers broad exposure to the U.S. consumer staples segment. It has managed assets worth $5.1 billion and sees volume of 187,000 shares a day on average (read: Consumer Staples ETFs Red Hot: Will the Rally Last?).

With a market cap of $6.4 billion, Pilgrim's Pride Corporation PPC is one of the largest chicken companies in the United States, Mexico and Puerto Rico. The stock is expected to see earnings growth of 43% year over year this year and has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sectors to Avoid

Financials

SPDR S&P Regional Banking ETF KRE, with AUM of $2.2 billion and average daily volume of 8.3 million shares, offers broad exposure to the regional banks segment. The fund charges 35 bps in annual fees and has a Zacks ETF Rank #3.

With a market cap of $20.6 billion, State Street Corporation STT is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management and investment research and trading. The stock is expected to post earnings decline of 14.5% for this year. It carries a Zacks Rank #5 (Strong Sell).

Industrials

Zacks #3 Ranked Invesco S&P 500 Equal Weight Industrials ETF RGI offers exposure to the broad industrial sector with equal-weight exposure. It has AUM of $204.6 million and trades in an average daily volume of nearly 22,000 shares (read: US Manufacturing PMI Data Highly Disappointing: ETFs in Focus).

Astec Industries Inc. ASTE is a manufacturer of specialized equipment for building and restoring the world's infrastructure. It has a Zacks Rank #5 (Strong Sell) and market cap of $684.7 million. Its earnings are expected to decline 19.9% for this year.

Consumer Discretionary

Invesco DWA Consumer Cyclicals Momentum ETF PEZ provides exposure to consumer discretionary companies that are showing relative strength (momentum). With AUM of $50.8 million and average daily volume of 13,000 shares, the fund carries a Zacks ETF Rank #3.

Sony Corporation SNE, which develops and manufactures consumer and industrial electronic equipment, has a Zacks Rank #4 (Sell) and a market cap of $66 billion. It is expected to see earnings decline of 41.4% for this fiscal year (ending March 2020).

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