July witnessed the “Great Rotation” in the U.S. stock market on an apparent “AI fatigue”, growing expectations of the Fed cutting rates in September and a resurgence in Trump trade. Investors shunned the hot technology stocks in favor of smaller companies and other sectors, which are the bigger beneficiaries of the Fed rate cuts.
The Dow Jones Industrial Average, which missed the rally in the first half of 2024, was the outperformer last month. The blue-chip index gained 4.4% in July — its best month since December. Meanwhile, the S&P 500 advanced 1.1% and the tech-heavy Nasdaq Composite Index slipped 0.8% amid the steep decline in “Mag 7.”
Broadening of the Market Breadth
The market rally is broadening beyond the technology sector, as a rate cut will benefit the companies with higher financing costs. Meanwhile, the US economy expanded at a faster-than-expected pace in the second quarter of 2024.
The advance estimate of second quarter US gross domestic product (GDP) showed that the economy grew at an annualized pace of 2.8% in Q2, well above the 2% growth expected by economists surveyed by Bloomberg, as quoted on Yahoo Finance. The reading came in higher than first quarter GDP, which was revised down to 1.4%.
Small-Cap Stocks Leading the Rally
Small-cap stocks generally lead the way higher on improving American economy as these are closely tied to the domestic economy and generate most of their revenues from the domestic market. Plus, small-cap companies have a higher level of debt and hence, any rate cut move taken by the Fed is a plus for the segment (read: Small-Cap ETFs to Rally on Upbeat U.S. Q2 GDP Growth Data?).
Below we highlight a few winning ETF areas of July.
ETFs in Focus
Homebuilding – iShares U.S. Home Construction ETF ITB – Up 16.7%
The chances of a Fed rate cut in the month of September has boosted homebuilding stocks and ETFs. Lower interest rates make borrowing cheaper, which can boost demand for mortgages and subsequently for home purchases. Cheaper borrowing costs can also encourage builders to undertake more projects, thereby boosting homebuilding activity.
Volatility – iPath Series B S&P 500 VIX Short-Term Futures ETN VXX – Up 15.6%
Volatility crept up in the market as many tech stocks started to tumble lately on weaker sales outlook or delayed return-on-investment on their mammoth artificial intelligence (AI) projects. As a result, volatility in the stock market increased.
Small Banks – First Trust NASDAQ ABA Community Bank Index Fund QABA – Up 14.6%
As the yield curve steepened last week, shares of small banks surged as a steepening yield curve enhances the net interest rate margin. This has resulted in a rally in small-cap bank stocks and ETFs.
Telecom — SPDR S&P Telecom ETF XTL – Up 13%
SPDR S&P Telecom ETF provides exposure to the telecommunications segment and follows the S&P Telecom Select Industry Index. The fund gained on upbeat sector activities and low interest rates backdrop.
Biotech – ARK Genomic Revolution ETF ARKG – Up 10.9%
ARK Genomic Revolution ETF is an actively managed fund focused on companies that are likely to benefit from extending and enhancing the quality of human and other life by incorporating technological and scientific developments, and advancements in genomics into their business. With high-growth biotech stocks gaining on Fed rate cut hopes, the fund ARKG probably surged in July.
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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
SPDR S&P Telecom ETF (XTL): ETF Research Reports
First Trust NASDAQ ABA Community Bank ETF (QABA): ETF Research Reports
ARK Genomic Revolution ETF (ARKG): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
