In 2024, the Federal Reserve will commence a cycle of interest rate cuts. Which ETFs should be on your radar during this rate-cutting cycle?
Russell 2000 Index ETF, IWM:
While major indices like the S&P, Nasdaq, and Dow are approaching new highs, the Russell 2000 Index, representing 2000 small-cap stocks, has been consolidating for nearly two years. In 2024, there is a strong likelihood that the Russell 2000 may experience a catch-up rally.
The long-term suppression of the Russell 2000 can be attributed to two main factors:
During a bull market phase, small-cap stocks detach from fundamentals, experiencing significant gains only to undergo a substantial decline. It takes time for the bottom chips to turn over, allowing for a recovery.
Interest rate hikes have a significant impact on growth stocks, particularly those lacking fundamental support. During periods of monetary tightening, funds tend to consolidate around core heavyweight stocks, often at the expense of peripheral small-cap stocks.
If there is incremental capital in 2024, fund managers are likely to allocate towards small-cap growth stocks that still exhibit sound fundamentals, despite a lackluster performance in 2023. IWM tracks the 2000 small-cap stocks ranked from 1001 to 3000, having broken out of a rectangle pattern, signaling a potential bottom formation and subsequent rally.
ARKK/ARKW:
In 2022 and 2023, small-cap growth stocks, including those within the ARK funds, experienced a significant downturn amid interest rate hikes. The Federal Reserve has explicitly outlined a slow rate-cutting cycle starting from 2024, which is a substantial positive for growth stocks. As rate hikes negatively impact growth stocks, a reversal in rates could bode well for funds like ARKK and ARKW. With the prospect of a slow rate-cutting cycle post-2024, these funds might present opportunities outweighing risks.
TLT:
A rate cut is a direct boon for long-term bonds, making TLT (20+ year bond ETF) worth monitoring. Bond performance is highly sensitive to interest rates and credit risk, with U.S. bonds theoretically free from credit risk. If the Federal Reserve initiates a continuous three-year rate-cutting cycle, TLT becomes an asset of interest as it predominantly comprises bonds with maturities exceeding 20 years.
Comments