The Federal Reserve might be done raising interest rates for a while. And some investors are looking for the best ETFs if that's the case.
Investors are now betting on when the economy might slow down enough to justify lower rates. That means investors may need to pivot as well. It's time to think about stocks and funds that could hold up better in an environment where recession fears may be more prevalent than worries about persistent inflation.
"Next year could be a sluggish one in terms of economic activity," said John Norris, chief investment officer at Oakworth Capital, a Birmingham, Ala.-based bank with $1.9 billion in assets under management. "We could have three or four rate cuts by the end of next year."
He added that the economy could soften enough that some retailers may even start to cut prices in order to stimulate demand and get rid of excess inventory.
But that isn't necessarily a negative for investors. Norris adds that levelheaded investors can find opportunities during an economic slump. He argues that a recession is not a time to panic. That's especially true since he thinks that any coming downturn is not going to be nearly as bad as the Great Recession from fifteen years ago. That implosion led to the collapse or fire sales of Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch and several other brand name banks and Wall Street firms.
"When people hear the word recession they think 2008-2009 and the worst case scenario," Norris said. "But it's been a long time since we had a normal recession like 2001. Any recession we have next should be relatively mild." (The economy also briefly dipped into recession in 2020 due to the Covid-19 pandemic.)
So how can people profit when the Fed is easing? Norris thinks it's time to look for investments that can benefit from a likely pullback in the dollar. The greenback typically weakens during rate cutting cycles. Here are three ETFs that Norris thinks are worth a look.
Oil's Still Well For Best ETFs
Norris said that a drop in the value of the dollar tends to be good news for commodities. Various commodities usually experience a tick up in price due to a weaker dollar. That's particularly the case for oil.
Oakworth is recommending the SPDR S&P Oil & Gas Exploration & Production ETF. It owns a diverse mix of oil companies and its picks are roughly equal weighted. So you won't wind up with outsize bets on megacaps like Exxon Mobil and Chevron.
Instead, you'll get more exposure to the types of companies that could be takeover targets in the rapidly consolidating industry. (Exxon Mobil is buying Pioneer Natural Resources, shortly after closing a deal for Denbury. Chevron is acquiring Hess.)
Norris noted that some of the top picks in the XOP fund are mid-caps like Southwestern Energy, Diamondback Energy and HF Sinclair. All three are based in oil-rich Texas.
"Reports of the death of the fossil fuel industry in the U.S. are greatly exaggerated. We're bullish long-term," Norris said.
Crazy For Commodities
Oil likely won't be the only commodity that benefits from a lower interest rate environment and resulting weaker dollar. Most commodities should get a lift. Why? They are priced in dollars and their value goes up as the dollar declines.
Norris said his firm is considering dipping its toe in the iShares S&P GSCI Commodity-Indexed Trust ETF to get broader exposure to the commodities sector. "If the dollar does what we think it will, this fund should do well," he said.
GSG owns a mix of futures contracts tied to industrial metals like aluminum and copper, precious metals gold and silver as well as agricultural commodities such as corn, soybeans and wheat.
And, of course, the ETF also has big positions in crude oil and natural gas.
Looking For An Income Kick From Best ETFs
The last ETF that Norris recommends isn't a play on commodities. But it also could thrive in a potentially deflationary or disinflationary environment. The JPMorgan Equity Premium Income ETF is an actively managed fund. It's actually the largest actively managed ETF on the market. The ETF owns a mix of large cap stocks that pay big dividends. But it also sells covered call options against stocks it owns and pays out the premiums from them to the fund's holders.
Norris notes that this allows the fund to buy both growth and value stocks. Growth stocks like Amazon.com, Adobe and Microsoft are top holdings. And the ETF also owns more traditional value stocks like insurers Progressive and UnitedHealth plus payments giants Visa and Mastercard.
That strategy is a big reason why the fund sports a monthly standardized SEC yield of nearly 8%. That's significantly higher than the 10-year U.S. Treasury rate, currently around 4.2%, and the average dividend yield of just 1.5% for the S&P 500.
So this ETF can potentially benefit from a slower economy, particularly if bond yields continue to drop. "The Fed will have ammunition to cut rates as early as May," Norris said.
John Norris
- Chief investment officer
- Oakworth Capital
- A potential slowdown in the U.S. economy next year could result in interest rate cuts and a weaker dollar, Norris says. It's time to look for investments that can benefit.
