Monetary Policy2025-09-26

Fed Rate Cut Cycle Gains Momentum: Bond ETFs and Dividend ETFs Back in the Spotlight

Demand for bond ETFs is surging on signals of further Fed rate cuts, while high-dividend ETFs are also gaining appeal. It is time for investors to use a rebalancing calculator to adjust their portfolios in response to the changing rate environment.

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As the Federal Reserve accelerates its rate-cutting cycle in earnest, new investment opportunities are opening up in both the bond market and dividend stock market. In particular, the appeal of long-term bond ETFs and high-dividend ETFs has risen sharply, making asset reallocation strategies using a portfolio calculator increasingly important. Historically, bonds and dividend stocks have delivered relatively strong performance during periods of falling rates, and now is the time to consider increasing exposure to these asset classes.

Duration Risk and Opportunity in Long-Term Bond ETFs

In a rate-cutting cycle, long-term bond ETFs can see significant price appreciation due to their high duration. Long-term bond ETFs such as TLT (20-Year US Treasury ETF) and EDV (Extended Duration Treasury ETF) are drawing attention, and are expected to benefit from declining real yields as inflation stabilizes. However, to manage the risk of rate volatility, it is important to use an asset allocation calculator to determine the appropriate weighting.

Rising Appeal of High-Dividend ETFs

As falling rates reduce returns on deposits and bonds, the relative appeal of high-dividend stocks is coming into focus. ETFs such as VYM (Vanguard High Dividend Yield ETF) and SCHD (Schwab US Dividend Equity ETF) are attracting attention as investment alternatives that offer both stable dividend income and potential capital gains. In particular, dividend stocks in the utilities, telecom, and consumer staples sectors are expected to be direct beneficiaries of declining rates.

The Re-emergence of REIT ETFs and Infrastructure Investments

Real estate investment trusts (REITs) and infrastructure investments are also expected to benefit from falling rates. Real estate-related ETFs such as VNQ (Vanguard Real Estate ETF) can enjoy a dual benefit from lower borrowing costs and rising asset values. Infrastructure ETFs, too, can serve as attractive investment alternatives in a low-rate environment, backed by stable cash flows.

Sector Rotation Strategy

In a rate-cutting cycle, there is a high likelihood of rotation between growth and value stocks. It is important to balance growth-oriented ETFs focused on technology (QQQ, VGT) with value stock ETFs in financials and energy (VTV, VTI). In particular, since the financial sector is directly impacted by rate declines, risk management through adjusting the weighting of XLF (Financial Sector ETF) is necessary.

Conclusion

The Fed's rate-cutting cycle is creating new investment opportunities in the bond and dividend stock markets. Investors should use a rebalancing calculator to review the duration risk and sector exposure of their current portfolios, and consider a strategy of gradually increasing allocations to asset classes that benefit from falling rates. Use the portfolio calculator to design an optimal asset allocation in response to changing interest rates.

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