Buy 5 Growth ETFs as Fed Stays Put, Eyes Rate Cut

The Fed opted to maintain its benchmark interest rate within a range of 5.25% to 5.50%, a level it has maintained since July 2023 and has revised its rate cut prediction. While previously predicting three rate cuts for the year, the Fed scaled back its estimate to just one due to sticky inflation.

However, there was a division among officials, with eight estimating two cuts, seven predicting one and four foreseeing no cuts for the year. Despite the reduced rate cut expectations for 2024, Fed officials increased their collective forecast for 2025, anticipating a median of four additional rate cuts.

Inflation Outlook

The Fed revised its 2024 inflation forecast, expecting prices to end the year at 2.8% compared to the previous estimate of 2.6%. The Fed stressed on the importance of inflation returning to the 2% target before considering rate cuts.

Is There Any Optimism?

The Fed's policy statement reflected some newfound optimism, noting "modest further progress" toward the inflation target, a departure from previous statements. Fed chair Powell acknowledged the risks of waiting too long or acting too early on rate cuts.

Notably, U.S. annual inflation slowed to 3.3% in May 2024, the lowest in three months compared to 3.4% in April and forecasts of 3.4%. Core CPI hit 3.4%, coming in below the expected 3.5%. This marked the lowest rate since April 2021.

September Rate Cut Possibility

The odds of a rate cut in September rose following the CPI report, but the decision hinges on continued improvement in inflation data. There is currently a 55% probability of a 25-bp rate cut in September, up from 46.8% recorded on Jun 11, 2024, per CME FedWatch Tool. The Fed retained its unemployment and GDP outlook for the year while raising its neutral rate forecast.

Growth ETFs to Play

Higher chances of a Fed rate cut in September and the retention of the rate in the latest meeting bode well for growth investing as the segment tends to do well in a low-rate-environment. However, we have highlighted low P/E growth ETFs that are still cheap in valuation as the investing backdrop is still edgy due to persistent inflation, occasional overvaluation concerns and the presidential election due this year.

ETFs in Focus

Invesco Bloomberg Pricing Power ETF POWA – Zacks Rank #2 (Buy); P/E: 18.28X

The underlying Bloomberg Pricing Power Index is composed of U.S. large and mid-capitalization companies that are well-positioned to maintain stable profit margins in all market conditions while focusing on companies that have the smallest deviations among their annual gross profit margins over the last five years. The fund charges 40 bps in fees and yields 1.49% annually.

Invesco S&P 500 Pure Growth ETF RPG – Zacks Rank #2; P/E: 26.76X

The underlying S&P 500 Pure Growth Index measures the performance of securities that exhibit strong growth characteristics in the S&P 500 Index. The fund charges 35 bps in fees and yields 0.91% annually.

SPDR Portfolio S&P 500 Growth ETF SPYG – Zacks Rank #2; P/E: 28.44X

The underlying S&P 500 Growth Index measures the performance of the large-capitalization growth sector in the U.S. equity market. The fund charges 4 bps in fees and yields 0.87% annually.

Invesco NASDAQ 100 ETF QQQM – Zacks Rank #2; P/E: 30.26X

The underlying NASDAQ-100 Index includes securities of 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq. The fund charges 15 bps in fees and yields 0.62% annually.

Vanguard Russell 1000 Growth ETF VONG – Zacks Rank #2; P/E: 32.60X

The underlying Russell 1000 Growth Index measures the performance of large-capitalization growth stocks in the United States. The fund charges 8 bps in fees and yields 0.63% annually.

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