The financial markets have witnessed significant gains over the past few years, with indices like the S&P 500 and Nasdaq-100 achieving impressive returns. While short-term volatility remains a possibility, long-term trends suggest continued growth. Investors looking to maximize their returns should consider exchange-traded funds (ETFs) that benefit from specific market catalysts, such as falling interest rates. This article explores three ETFs poised to thrive in the coming year due to declining rates.
Potential Gains from Dividend-Paying Stocks
Dividend-paying stocks have not performed as well as the broader market this year, largely due to higher interest rates affecting valuations. However, this underperformance has created an attractive entry point for investors. One notable ETF is the Schwab U.S. Dividend Equity ETF, which offers a more affordable price-to-earnings ratio compared to the S&P 500 and provides a significantly higher dividend yield. This fund's focus on high-quality dividend stocks positions it well to capitalize on falling rates, enhancing both income and capital appreciation potential.
The Schwab U.S. Dividend Equity ETF currently trades at a lower valuation than the tech-heavy S&P 500, making it a value play for investors seeking higher yields. The fund’s average price-to-earnings ratio of 18.4 is notably cheaper than the S&P 500’s 25.8. Additionally, its 3.3% dividend yield stands out against the S&P 500’s 1.2%, offering substantial income. For instance, a $1,000 investment would generate approximately $33 in dividends annually, compared to just $12 from an S&P 500 index fund. As interest rates continue to decline, the fund’s value should rise, further boosting total returns. Moreover, the fund’s portfolio consists of companies with strong records of increasing dividends, ensuring a steady and growing income stream even if the market experiences a correction.
Bond Market and Real Estate Investment Opportunities
Bonds and real estate are highly sensitive to interest rate changes, making them prime candidates for investment as rates fall. Bonds tend to increase in value when rates drop, while real estate values typically recover as borrowing costs decrease. Two ETFs that stand out in these sectors are the Vanguard Total Bond Market ETF and the Vanguard Real Estate ETF. Both offer compelling opportunities for investors looking to capitalize on the anticipated rate cuts.
The Vanguard Total Bond Market ETF provides broad exposure to the bond market, holding over 11,300 bonds, with nearly 70% backed by the U.S. government. This makes it a low-risk investment option. The fund currently offers an average yield to maturity of 4.6%, generating about $46 in interest income per $1,000 invested. As interest rates continue to decline, the value of these bonds should rise, enhancing total returns. Similarly, the Vanguard Real Estate ETF focuses on real estate investment trusts (REITs), which have historically outperformed stocks over the long term. With commercial real estate values expected to recover, this ETF offers both attractive dividend yields and potential capital appreciation. A $1,000 investment would produce around $33 in annual dividends, complemented by rising property values as rates fall. These ETFs present robust investment options for 2025, potentially outperforming broader-market ETFs if stock markets experience a slowdown.