The worst-kept secret on Wall Street? The Federal Reserve is going to start lowering interest rates at some point in 2024. Hopes for Fed easing have fueled the stock market's gains for the past few months.
But it's not too late for investors to make moves to position themselves for the eventual rate cuts. There are opportunities, especially if investors look beyond the vaunted Magnificent Seven and other growth stocks.
"We're hoping this year will be more about the rest of the S&P 500. You have to wonder about the sustainability of the run that the Magnificent Seven has had," said Chad Oviatt, a director of investment management at Huntington Private Bank who oversees more than $6 billion in mutual fund and exchange traded fund assets.
"It might be time to exhale and catch your breath. These (large tech) stocks could be rangebound this year," Oviatt added. "If the Fed does start to cut, that could benefit small- and midcaps more. Even though large caps have led the market out of the gate this year, diversification still matters."
Diversification also means looking beyond stocks to other asset classes. Along those lines, Oviatt says his firm is now underweight stocks and is loading up more on fixed-income investments. And within the world of stocks, Oviatt favors dividend players around the globe that offer compelling yields at a time when interest rates should head lower.
Here are three ETFs Oviatt is recommending that offer investors a way to get exposure to steady income streams at a time when both short-term and long-term rates are likely to start falling.
Bulking Up On Bonds
Buying individual bonds isn't as easy as buying stocks. That's where ETFs come in. Oviatt is a fan of Invesco's BulletShares family of funds. These funds offer a portfolio of corporate, high-yield and municipal bonds with maturity dates going out over the next decade.
Oviatt said the 2027 Invesco BulletShares 2027 Corporate Bond ETF and the companion Invesco BulletShares 2027 Municipal Bond ETF give investors income as well as the boost to value that comes when yields fall. He thinks this scenario is likely once the Fed starts to loosen monetary policy.
"The way that bond math works, when interest rates go down, you get price appreciation," Oviatt said, reminding investors of Bond Buying 101. "So if you don't need the income, you can trade these ETFs. The simplicity is compelling." The BSCR ETF has a current yield of about 4.8%.
But Huntington isn't investing in the BulletShares high-yield ETFs due to the greater credit risk. High yield often equals junk bonds, after all. But Oviatt says the corporate and muni bonds maturing in 2027 give investors enough time to profit from the likely slowdown in the U.S. economy and interest rate cuts that will come with that. "This is typically for a longer-term buy-and-hold investor," he said.
Adding To Yield
The iShares Yield Optimized Bond ETF, a fund of funds, invests in several fixed-income ETFs offered by iShares and its parent company, BlackRock. This ETF is a way to bet on the Fed starting to lower rates ... but maybe not as aggressively as some traders are expecting.
"Inflation is still very real," Oviatt said. He noted that the rate of the Fed's preferred inflation measure — the core personal consumption expenditures price index (PCE) — is falling. Still, the measure recently increased 2.9% from a year ago. "It's not likely to get to the Fed's target of 2% anytime soon," he added.
With that in mind, this ETF gives investors a way to generate income from a mix of funds that own investment-grade bonds. It also owns mortgage-backed securities, government agency bonds and floating rate debt among other fixed-income vehicles. The ETF has a yield of about 4.5%.
"This fund is a yield play but also a diversification play," Oviatt said, adding that it's a better bet than just buying U.S. Treasury bonds. That's important now that the market is unsure how many times the Fed will lower rates this year.
Some investors had been banking on five or even six interest rate cuts in 2024 before the Fed's January meeting. But Oviatt thinks three is more likely. He also thinks fewer cuts are actually a better sign for the corporate bonds that make up a large portion of the BYLD ETF.
"If the Fed has to cut more, what does that mean for the economy?" Oviatt said. "If we're actually heading towards a recession and cutting, that's one thing. But right now, six cuts seems excessive."
Finding Yield Outside The U.S. Stock Market
The iShares BYLD ETF also owns emerging-market bonds, but Oviatt said emerging-market stocks are actually a good buy for investors, as long as they look for companies that pay steady dividends.
Yes, there are risks to emerging markets. There are worries about China's economy slowing. But Oviatt said the WisdomTree Emerging Markets High Dividend Fund is a way to minimize fears about problems in China's real estate market and concerns about more regulation from Beijing on high-tech companies.
Oviatt said the DEM ETF is a mostly passive fund that uses various screens to filter stocks. First and foremost, companies have to pay a dividend. So that eliminates much of the tech sector. The fund's managers whittle the universe of possible stock buys further by focusing on the top dividend payers with the strongest fundamentals.
"Dividends are a way to reduce regional and country risk," Oviatt said. "Companies that are generating enough revenue to pay attractive dividends are the ones with higher-quality balance sheets."
The DEM ETF does have a big weighting in Chinese stocks. But the companies tend to be more of the state-run industrial firms, such as China Shenhua Energy, China Construction Bank and PetroChina.
"The fund has more of the state-owned operators, so there are fewer concerns about crackdowns on tech and video games," Oviatt said. "We also like that the fund is not heavy into utilities and real estate. So you're getting more than just income."
What's more, two of the fund's three largest holdings are based in Brazil: oil giant Petrobras and mining leader Vale. Nearly a quarter of the ETF's holdings are in companies headquartered in India, South Africa, Mexico, South Korea or Indonesia. So the fund offers a true global mix and has a dividend that yields more than 6.3%.
Oviatt also likes the fact that the fund has been around since 2007. So it's battle tested, having made it through the global financial crisis of 2008-09 and other geopolitical turmoil. "This fund has faced a lot of challenges since its infancy," he said.
