In the FOMC meeting concluded on Jun 10, the Federal Reserve Chair Jerome Powell maintained a dovish stance and stated that there is no expectation of rate hike through 2022. The central bank has pledged to continue pumping in stimulus until the economy is back on track.
The central bank slashed its interest rate to a range of 0% to 0.25% in mid-March in a bid to protect against the coronavirus pandemic’s economic toll. It followed up its rate cuts with unprecedented lending programs extending credit to corporations, households and municipalities. The central bank also set a floor for its asset purchases, pledging to take in at least $80 billion in Treasuries every month and $40 billion worth of mortgage-backed securities.
The central bank predicts unemployment rate to fall to 9.3% by the end of this year. Though it is down from 13.3% in May, it will be substantially above the 3.5% rate recorded in February — a near 50-year low. The unemployment will then likely improve to 6.5% in 2021. U.S. GDP was projected to contract by 6.5% this year before rebounding 5% next year. Inflation was forecast to remain below the Fed’s 2% target through 2022.
Lower Rates: A Boon
Low rates are a boon for high-yield sectors such as utilities and real estate as well as the dividend paying securities. When interest rates remain low, these sectors, which are generally known for the income they generate, gain momentum. Utilities offer solid dividend payouts and excellent capital appreciation over the longer term while real estate is required to distribute at least 90% of taxable income to its shareholders annually in the form of dividends.
Homebuilders will also get a boost as low rates will encourage people to buy more homes and make refinance cheaper. Overall, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and a rise in economic activities. This will, in turn, increase profitability across various segments (read: 4 Sector ETFs & Stocks to Buy on Record Jobs Gain in May).
Meanwhile, gold mining stocks will also get a boost, given that these are leveraged plays on the underlying metal. Lower rates will continue to weigh on the dollar against the basket of currencies, raising the metal’s attractiveness as it does not pay interest like fixed-income assets.
In such a scenario, investors could make a play on these sectors which should continue to trade smoothly in the wake of easing policies. Below we have highlighted some ETFs & stocks that could be excellent plays for investors through the second half of the year.
Schwab US REIT ETF SCHH
SCHH tracks the Dow Jones U.S. Select REIT Index, holding a well-diversified basket of 98 stocks with none accounting for more than 10.4% of the assets. Residential REITs make up for the largest share at 26.2% while industrial REITs, specialized REITs, office REITs and retail REITs round off the next four spots with a double-digit allocation each. The product has AUM of $5.1 billion and average daily trading volume of 1.7 million shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
Utilities Select Sector SPDR XLU
With AUM of $11.8 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 15% share while other firms hold no more than 8.4% of the assets. Electric utilities takes the top spot in terms of sectors at 63.1%, closely followed by multi utilities (31.6%). The product charges 13 bps in annual fees and sees heavy volume of around 20.3 million shares on average. XLU has a Zacks ETF Rank #3 with a Medium risk outlook (read: Top ETFs & Stocks From Top-Ranked Sectors).
iShares U.S. Home Construction ETF ITB
This ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 44 stocks with double-digit allocation going to the top two firms and others accounting for no more than 9.5%. Homebuilding takes the top spot at 69.6%, followed by 12% in building products and 9.6% in home improvement retail. The product has amassed $1.4 billion in its asset base and trades in heavy volume of around 3.3 million shares a day on average. It charges 42 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.
VanEck Vectors Gold Miners ETF GDX
This is the most popular and actively traded gold miner ETF with AUM of $14.4 billion and average daily volume of around 54.4 million shares. The fund follows the NYSE Arca Gold Miners Index, holding 50 stocks in its basket. Canadian firms account for half of the portfolio, while the United States (19.5%) and Australia (14.3%) round off the top three. The fund charges 52 bps in annual fees.
Medical Properties Trust Inc. MPW
This is a self-advised real estate investment trust formed in 2003 to acquire and develop net-leased hospital facilities. It has seen positive earnings estimate revision of a penny over the past month for this year and has an estimated growth rate of 23.8%. It has a Zacks Rank #3 and VGM Score of B.
Sempra Energy SRE
The energy services holding company is involved in the sale, distribution, storage and transportation of electricity and natural gas. The stock has witnessed positive earnings estimate revision of 10 cents for this year over the past month and has an estimated growth rate of 7.7%. It carries a Zacks Rank #2 and has a VGM Score of B.
D.R. Horton Inc. DHI
It is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. The stock has seen positive earnings estimate revision of a couple of cents over the past month for this year and has an estimated growth rate of 7.2%. It has a Zacks Rank #3 and VGM Score of B (read: Housing ETFs Sizzle With Opportunities as Economy Reopens).
Harmony Gold Mining Company Limited HMY
This company is engaged in the exploration, extraction and processing of gold. It has witnessed positive earnings estimate revision of a penny for this year over the past month and has an estimated growth rate of 28.6%. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
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