Growing uncertainty around President-elect Trump’s economic proposals and their impact on inflation has led the market to increase bets on the Fed adopting a more gradual pace of interest rate cuts in 2025, opting for a cautious approach.
Many economists warn that Trump’s primary campaign promises to impose new tariffs and initiate a "mass deportation" of undocumented immigrants, which could drive prices upward. President-elect Trump’s proposed extreme tariffs could disrupt disinflation trends, leading to elevated interest rates (Read: Will Trump's Tariffs Fuel Inflation? ETFs in Focus).
Signals of Gradual Rate Cuts Ahead?
According to a majority of economists, per a Reuters poll, the Fed is set to lower interest rates in December but implement smaller rate cuts in 2025 compared to the forecasts made in the previous month.
According to Reuters, persistent economic strength, stubborn inflation and stock markets nearing record highs have created obstacles to swift rate cuts. Adding to the growing uncertainty, BofA recently raised its terminal Fed funds rate forecast to 3.75-4.00% from its previous estimate of 3.00-3.25%, as quoted on Reuters.
Some FOMC members, Reuters added, have suggested that the central bank may fully pause its rate cuts and maintain a restrictive level if inflation stays elevated, implying that rate reductions could be delayed if inflation remains above the 2% target.
Fed officials seemed split in their discussions earlier this month regarding how much further the interest rates may need to be cut, having the view that they should hold it at a restrictive level. With no unanimous decision on the Fed's direction and economists offering diverging views, investors should maintain a cautious approach.
Is Inflation Progress Slipping Away?
For the month of October, the Personal Consumption Expenditures (PCE) price index rose 0.2% while core inflation increased 0.3%, according to the U.S. Commerce Department, as quoted on CNBC. This highlights growing concerns over rising inflation.
Per Reuters, technology stocks faced a decline on Thanksgiving, pulling the Nasdaq down, as concerns grew that the Fed may take a cautious approach to rate cuts following persistently strong U.S. inflation data. With progress on reducing inflation seemingly stalled, expectations remain that the central bank will keep rates unchanged at its January and March meetings.
Exploring ETFs
Below, we have highlighted a few ETF areas to which investors may consider expanding their exposure. These offer a hedge amid uncertainties surrounding the path of interest rates.
Value ETFs
Value stocks have a track of long-term outperformance and resilience against market trends. Characterized by solid fundamentals such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation. They offer the potential for higher returns and lower volatility compared to growth and blend stocks.
Vanguard Value ETF (VTV)
Vanguard Value ETF charges an annual fee of 0.04% and has a dividend yield of 2.19%. The fund Zacks ETF Rank #1 (Strong Buy). VTV has gained 3.03% over the past three months and 31.47% over the past year.
iShares Russell 1000 Value ETF (IWD)
iShares Russell 1000 Value ETF charges an annual fee of 0.19% and has a dividend yield of 1.73%. The fund has a Zacks ETF Rank #1. IWD has gained 2.91% over the past three months and 30.74% over the past year.
iShares S&P 500 Value ETF (IVE)
iShares S&P 500 Value ETF charges an annual fee of 0.18% and has a dividend yield of 1.76%. The fund has a Zacks ETF Rank #2 (Buy). IVE has gained 2.74% over the past three months and 31.45% over the past year.
Dividend ETFs
Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantage safety— in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.
Vanguard Dividend Appreciation ETF (VIG)
Vanguard Dividend Appreciation ETF charges an annual fee of 0.06% and has a dividend yield of 1.68%. The fund has a Zacks ETF Rank #1.
Schwab US Dividend Equity ETF (SCHD)
Schwab US Dividend Equity ETF charges an annual fee of 0.06% and has a dividend yield of 3.32%. The fund has a Zacks ETF Rank #3 (Hold).
Vanguard High Dividend Yield Index ETF (VYM)
Vanguard High Dividend Yield Index ETF charges an annual fee of 0.06% and has a dividend yield of 2.70%. The fund has a Zacks ETF Rank #2.
Consumer Staples ETFs
Consumer staples are essential products like food, beverages, household items and hygiene products, including alcohol and tobacco. They are non-cyclical, with demand remaining consistent regardless of economic conditions.
Consumer Staples Select Sector SPDR Fund (XLP)
Consumer Staples Select Sector SPDR Fund charges an annual fee of 0.09% and has a dividend yield of 2.55%. XLP has gained 3.49% over the past three months and 21.38% over the past year.
Vanguard Consumer Staples ETF (VDC)
Vanguard Consumer Staples ETF charges an annual fee of 0.10% and has a dividend yield of 2.48%. VDC has gained 2.96% over the past three months and 21.45% over the past year.
iShares U.S. Consumer Staples ETF (IYK)
iShares U.S. Consumer Staples ETF charges an annual fee of 0.40% and has a dividend yield of 2.46%. IYK has gained 1.29% over the past three months and 14.59% over the past year.
Research Chief Names "Single Best Pick to Double"
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Free: See Our Top Stock And 4 Runners UpConsumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
Vanguard Value ETF (VTV): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
iShares Russell 1000 Value ETF (IWD): ETF Research Reports
iShares S&P 500 Value ETF (IVE): ETF Research Reports
Schwab U.S. Dividend Equity ETF (SCHD): 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.
