The Fed is likely to deliver the first interest rate cut since 2020 in its meeting, scheduled to start on Tuesday. Markets are pricing in 50% chances of a 50-bps rate cut and 50% odds of a 25-bps rate cut, according to CME Group's FedWatch tool.

With the declining inflation, cooling labor market and growing economy, policymakers view the current conditions as suitable for a rate cut. Markets have almost fully priced in expectations for 100 bps of Fed rate cuts by the end of 2024, with nearly 60% odds of 125 bps in cuts.

Low Rates: A Boon

Lower interest rates generally lead to reduced borrowing costs, which help businesses expand their operations easily, resulting in increased profitability. This, in turn, stimulates economic growth and provides a boost to the stock market. 

In particular, high-dividend-yield sectors, such as utilities and real estate, will be the biggest beneficiaries of the rate cuts, given their sensitivity to interest rates. This is especially true as these offer higher returns due to their outsized yields. In real estate, lower rates can boost housing market activities by making mortgages more affordable. Securities in capital-intensive sectors like telecom will also benefit from lower rates. Businesses will face lower loan rates over time (read: ETFs & Stocks With Yield of More Than 5% to Buy). 

Lower rates will have a positive impact on consumer discretionary and financial services. Reduced borrowing costs can lead to increased consumer spending for consumer discretionary sectors. In the financial sector, while lower rates can compress net interest margins for banks, they can also encourage lending and lead to increased consumer and business loan activity.

Small-caps are set to outperform in a lower-rate environment as these companies are loaded with higher levels of debt. Fed rate cuts tend to boost foreign capital inflows into emerging markets like India. As the outlook for India’s economy remains strong, rate cuts will boost foreign capital inflow, which can lead the market to new highs. Gold will also continue to shine as lower interest rates will increase the metal’s attractiveness.

Given this, we have highlighted ETFs from sectors that are set to explode following a rate cut.

ETFs to Gain

Vanguard Real Estate ETF (VNQ) 

Vanguard Real Estate ETF targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 155 stocks in its basket, with none accounting for more than 13.4% share. VNQ has key holdings in retail REITs, telecom tower REITs and industrial REITs with double-digit exposure each (read: Economic Slowdown Ahead? Sector ETFs to Play). 

Vanguard Real Estate ETF is the most popular and liquid ETF, with an AUM of $38.2 billion and an average daily volume of 3.8 million shares a day. It charges 13 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

iShares U.S. Home Construction ETF (ITB) 

iShares U.S. Home Construction ETF provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. 

With an AUM of $3.5 billion, iShares U.S. Home Construction ETF holds a basket of 44 stocks, with a heavy concentration on the top two firms. The product charges 39 bps in annual fees and trades in a heavy volume of around 2 million shares a day, on average. iShares U.S. Home Construction ETF has a Zacks ETF Rank #3 with a High risk outlook.

Consumer Discretionary Select Sector SPDR Fund (XLY) 

Consumer Discretionary Select Sector SPDR Fund offers exposure to the broad consumer discretionary space and tracks the Consumer Discretionary Select Sector Index. It holds 52 securities in its basket, with key holdings in specialty retail, broadline retail, hotels, restaurants and leisure, and automobiles with a double-digit allocation each. 

Consumer Discretionary Select Sector SPDR Fund is the largest and most popular product in this space, with an AUM of $18 billion and an average daily volume of around 3 million shares. It charges 9 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF is the largest and most popular ETF in the small-cap space, with an AUM of $66.9 billion and an average daily volume of 32 million shares. iShares Russell 2000 ETF holds well-diversified 1,974 stocks in its basket and has key holdings in financials, healthcare, industrials and information technology.

iShares Russell 2000 ETF charges 19 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

SPDR Gold Trust ETF (GLD)

SPDR Gold Trust ETF tracks the price of gold bullion measured in U.S. dollars and kept in London under the custody of HSBC Bank USA. It is an ultra-popular gold ETF with an AUM of $70.1 billion and a heavy volume of about 6 million shares a day. SPDR Gold Trust ETF charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 (read: 5 Popular ETFs to Tap Soaring Gold Prices).