Here's How to Go Long on Rate-Sensitive Sectors With ETFs

Finally, the Federal Reserve slashed interest rates for the first time since 2020 to address slowing economic growth. The central bank cut rates by 50 basis points (bps) to 4.75%-5% after holding it at a 23-year high for 14 consecutive months since July 2023. 

This shift in its monetary policy approach shows greater confidence that inflation is moving sustainably toward the 2% target level. It aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.

The central bank also projects two more rate cuts of another 50 bps by the end of this year in its final two meetings this year, due in November and December. It indicates a 100 bps rate cut next year and a 50 bps cut in 2026, which means four more rate cuts in 2025 and two in 2026 (read: 5 ETF Zones Set to Benefit When Fed Initiates Rate Cuts).

Lower interest rates generally lead to reduced borrowing costs, which can stimulate economic growth. This can positively impact sectors like real estate, consumer discretionary and financial services, which are typically sensitive to interest rate changes. In real estate, for instance, lower rates can boost housing market activity by making mortgages more affordable. For consumer discretionary sectors, reduced borrowing costs can lead to increased consumer spending. In the financial sector, while lower rates can compress net interest margins for banks, they can also encourage lending and potentially lead to increased consumer and business loan activity.

In such a scenario, investors could make a short-term bullish play on the rate-sensitive sectors as these spaces are likely to see huge gains in the wake of rate cuts.

How Should You Play?

While futures or long-stock approaches are some of the possibilities, leveraged ETFs might be good options. Leveraged ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying sector using various investment strategies such as swaps, futures contracts and other derivative instruments.

As most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as weeks, months or a year) due to the compounding effect.

However, these funds are cheaper options than directly going long or utilizing futures contracts. Given this, investors seeking to capitalize on the steady/declining rate scenario in a short span could consider any of the following ETFs, given the bullish outlook for the sectors. 

ProShares Ultra Real Estate (URE): This fund seeks to deliver two times the daily performance of the S&P Real Estate Select Sector Index. It has AUM of $86.5 million and charges 95 bps in annual fees.

Direxion Daily MSCI Real Estate Bull 3X Shares (DRN): This product seeks to deliver three times the performance of the Real Estate Select Sector Index. It has AUM of $120.6 million and charges 95 bps in annual fees. 

Direxion Daily Homebuilders & Supplies Bull 3X Shares (NAIL): It provides leveraged exposure to homebuilders and creates a three-time long position on the Dow Jones U.S. Select Home Construction Index. It charges an annual fee of 93 bps and has accumulated $369.3 million in its asset base. 

Direxion Daily Consumer Discretionary Bull 3X Shares (WANT): It offers leveraged exposure to the consumer discretionary sector, providing three times exposure to the Consumer Discretionary Select Sector Index. It has AUM of $25.3 million and charges 95 bps in annual fees (read: ETFs to Tap on Improving Consumer Sentiment). 

Direxion Daily Financial Bull 3x Shares (FAS): It provides three times exposure to the performance of the Financial Select Sector Index. The fund has amassed $2.4 billion in its asset base and charges 90 bps in annual fees.

Bottom Line

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).

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