FOMC Meeting Spotlights 'Soft Landing' ETFs

The Federal Reserve is set to conclude its two-day FOMC meeting today.  

Inflation is trending lower; the unemployment rate is slowly climbing and there is growing evidence that consumer spending is cooling. The Fed’s goal of a “soft landing” appears achievable and if the economic data continues to support it, the first rate cut since March 2020 will come this year, many analysts agree 

But when will the first rate cut happen?  

While most investors anticipate no change in interest rates from this FOMC meeting, they'll be closely monitoring the Fed's statements and Fed Chair Jerome Powell’s speech today for clues about a potential rate cut in September, when the Federal Open Market Committee is set to meet again. 

For prices on rate-sensitive ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) and the iShares Russell 2000 ETF (IWM) to advance this week, investors will need to hear the Fed provide clear hints that an interest rate cut is all but guaranteed.  

What Is a Soft Landing in Economics?

A soft landing in economics refers to a situation where an economy gradually slows from a period of rapid growth without entering a recession. It's often associated with the actions of a central bank, like the Federal Reserve as it mulls how to set monetary policy to cool down an overheated economy and curbs inflation.    

The goal of a soft landing is to achieve a balance: slowing the economy enough to control inflation without causing widespread job losses or a significant decline in economic output. It's like carefully guiding an airplane to a smooth touchdown.    

In contrast, a hard landing occurs when the economy slows down too rapidly, leading to a recession 

Are There Any Soft Landing ETFs?

While there are no ETFs that specifically target a soft landing economic environment, falling interest rates typically favor certain types of investments. Here are some types of ETFs that tend to perform well in such an environment:     

Long-term Treasury Bond ETFs

As interest rates decline, the prices of long-term bonds tend to rise more than bonds with shorter maturities. Top long-term Treasury bond ETFs include the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Long-Term Treasury Index Fund ETF (VGLT). 

Tech and Small Cap ETFs

Lower interest rates can stimulate economic growth, benefiting growth-oriented companies and technology stocks, which would support growth and tech ETFs like the Invesco QQQ ETF Trust (QQQ) and the Technology Select Sector SPDR ETF (XLK). 

Small businesses tend to rely more on debt than large companies, so lower interest rates could improve their financial health and help to boost small cap ETFs like the iShares Russell 2000 ETF (IWM) and the Vanguard Russell 2000 Index Fund (VTWO). 

Gold and Bitcoin ETFs

Falling interest rates often leads to a weaker U.S. dollar and rising economic uncertainty, both of which can support higher prices for alternative assets like gold and bitcoin. The largest ETFs in these respective markets are the SPDR Gold Shares ETF (GLD) and the iShares Bitcoin Trust ETF (IBIT). 

Bottom Line on Rate Cuts and Soft Landing ETFs

While all these ETFs may benefit from falling interest rates, the timing of investment is important, as the market tends to price in expectations long before the Fed cuts rates. Furthermore, a slowing economy may lead to a full-blown recession, which would not favor some soft-landing ETFs, especially in the equity space. 

To manage risk wisely, investors are encouraged to consider diversifying their portfolios across different asset classes.