Best ETFs to Buy Before Federal Reserve's Upcoming Interest Rate Cuts

The waiting game for the Federal Reserve's next move on interest rates has lasted over a year. After an extensive rate-raising campaign from 2022 to 2023 to combat inflation, the Fed has maintained steady rates since August 2023. However, a strong likelihood of pending rate cuts has been indicated by Federal Reserve Chairman Jerome Powell in recent meetings.

Impact on Investors

The actions of the Federal Reserve on interest rates have a significant impact on investors. While the markets are forward-looking, the Fed's own projections suggest that rate cuts are still some way off. This provides opportunities for investors to position themselves accordingly. Two particular exchange-traded funds (ETFs) stand out as prudent options ahead of the anticipated rate cuts: a small-cap value fund and a long-term Treasury bond fund.

One of the investment avenues to consider is a small-cap value fund. Smaller companies tend to be more sensitive to interest rates compared to larger ones, making an interest-rate cut particularly beneficial for smaller companies with floating rate debt. Moreover, well-established and profitable small-cap companies that rely on debt for growth offer lucrative investment opportunities as interest rates are expected to be cut.

A notable option in this regard is the Avantis U.S. Small Cap Value ETF (NYSEMKT: AVUV). This actively managed fund aims to outperform the Russell 2000 Value Index by selecting stocks based on book value and profitability, and investing in hundreds of small-cap stocks. The fund's low expense ratio of 0.25% of assets per year further enhances its attractiveness as a small-cap value stock investment.

Long-Term Treasury Bond Fund

Another avenue to capitalize on lower interest rates is to invest in government bonds, particularly long-term Treasury bonds. As the government issues new bonds at lower rates, the value of existing bonds will rise, resulting in a corresponding increase in the value of a long-term Treasury bond fund. The Vanguard Extended Duration Treasury ETF (NYSEMKT: EDV) represents a potent option in this respect, as it primarily holds U.S. Treasury STRIPS with an average effective maturity of 24.6 years. With a low expense ratio of 0.06%, this fund presents a cost-effective means to benefit from potential future rate cuts.

Investment Considerations

Before investing in the Avantis U.S. Small Cap Value ETF, it is advised to consider its standing in the context of investment alternatives. The Motley Fool Stock Advisor analyst team has identified 10 stocks that they believe represent the best investment opportunities at the current juncture. Prospective investors may also seek out information on the historical performance of these stocks to assess their potential for future growth.