Wall Street Dives on Less Dovish Fed: 5 ETF Zones That Win

Wall Street saw a bloodbath after the Fed’s rate-cut shift view. The S&P 500 dropped 2.9%, whereas the Dow Jones Industrial Average fell 2.6%. Both saw the biggest one-day percentage decline since Aug. 5. Notably, the Dow Jones suffered its 10th straight session of declines — its longest streak of daily losses since October 1974. Meanwhile, the tech-heavy Nasdaq Composite Index slid more than 3.5% — its biggest daily decline since July 24 (read: Dow on a Record Losing Streak: Should You Buy its ETF?).

The small-cap Russell 2000, seen as the biggest beneficiary of rate cuts, dropped 4.4%, which was its biggest decline since June 16, 2022. Meanwhile, Real Estate Select Sector SPDR ETF XLRE, which also stands to benefit from further rate cuts, fell 2.7%.

Behind the Plunge

At its latest meeting, Fed chair Jerome Powell cut rates by 25 bps to 4.25-4.50% as expected but delivered a less dovish view for 2025. Powell envisions only two rate cuts in 2025, in contrast to four projections in September, given the solid labor market and the recent stall in lowering inflation.

The latest inflation data shows that consumer prices have been ‘somewhat elevated’ in the world's largest economy. Inflation in the United States increased the most in seven months  in November . The Consumer Price Index grew at an annual rate of 2.7%, up from the 2.6% rise recorded in October and in line with economists' expectations. Higher costs for used cars, hotel rooms and groceries increased inflation. Excluding volatile food and energy costs, core prices rose 3.3% year over year, unchanged from October's increase. Core prices increased 0.3% on a month-to-month basis, the biggest rise since April (read: Inflation Edges Up in November: Bet on Quality ETFs).

Trump’s policies on restricting illegal immigration, enacting new tariffs, lowering taxes and reducing regulations will accelerate inflation, limiting the Federal Reserve's ability to cut rates.

The broad indices slump has led to smooth trading in a few corners of the ETF investing world. We have highlighted them below:

Volatility

The volatility level represented by the CBOE Volatility Index, also known as the fear gauge, jumped 74% to a four-month high of 27.62. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining, or fear levels about the future are high. 

Both iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares VIX Short-Term Futures ETF VIXY soared nearly 17%.

Low-Risk

Low-risk ETFs help protect portfolios from downside risks. Cambria Tail Risk ETF TAIL and AGF U.S. Market Neutral Anti-Beta Fund BTAL rose 2% and 1.7%, respectively. . These ETFs are designed for investors who prioritize capital preservation over high returns.

Cambria Tail Risk ETF seeks to mitigate downside market risks by purchasing a portfolio of "out of the money" put options on the S&P 500 Index, as well as U.S. Treasuries, to potentially provide income. The TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high.

AGF U.S. Market Neutral Anti-Beta Fundcan generate positive returns regardless of the stock market’s direction as long as low-beta stocks outperform high-beta stocks. It invests primarily in long positions in low-beta U.S. equities and short positions in high-beta U.S. equities on a dollar-neutral basis within sectors.

Dollar

The U.S. dollar rallied to the strongest level in more than two years after the Federal Reserve signaled a slowdown in the pace of its monetary easing next year. The Bloomberg Dollar Spot Index rose 0.9% — its highest since 2022. Invesco DB US Dollar Index Bullish Fund (UUP), which is the prime beneficiary of the rising dollar and offers exposure against a basket of six world currencies, rose 1.2% on the day (read: U.S. Dollar Hits a 1-Year High: ETFs to Gain & Lose).

Interest Rate Hedged

The interest rate hedge ETFs like Global X Interest Rate Hedge ETF RATE, Simplify Interest Rate Hedge ETF PFIX and Foliobeyond Rising Rates ETF RISR gained 2.5%, 1.7% and 1.1%, respectively. These ETFs offer protection amid a rising rate environment.

Healthcare

Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investor interest as the demand for healthcare services remains intact even if inflation moves higher. iShares U.S. Healthcare Providers ETF IHF provides exposure to companies that offer health insurance, diagnostics and specialized treatment. It has added 0.3% on the day.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

To read this article on Zacks.com click here.

Zacks Investment Research