ETF Expert

The market expects it. Jim Cramer demands it. Monday morning quarterbacks explained that they would have done it already.

So is the September 18 Fed Funds rate cut a done deal? Manufacturing showed some signs of slowing today. Incoming inflation numbers have been benign. And nearly every data point on real estate has been hideous.

(It sure looks like a done deal. And historically, when interest rates are about to fall, that has been the best time to move from safer havens to stock assets.)

There’s one more hurdle… and that’d be the August employment report due on Friday, September 7. Assuming labor conditions do not unexpectedly tighten (e.g., unemployment edges lower from 4.6% to 4.5%), the Fed has little choice but to show concern for the rising drag of housing on economic growth.

But the $24,000 ($240,000, $2.4M) question still is… "What part of the stock market is in the best position to profit from a rate cut?"

If history alone served as a guide, one would favor Financials in the S&P Spider Financials Index (XLF). The less the rate that banks have to borrow from one another, the better they perform. Moreover, financial companies are pretty quick to lower savings/CDs/money markets after the Fed lowers a Fed Funds target rate. (In short, "financials" typically have less costs and often earn more money in a rate-lowering environment.)

However, I DO NOT THINK history will be as helpful this time around. The reason? There’s not enough confidence in broad based financial companies due to lending difficulties, foreclosures, tighter lending standards as well as investment losses in subprime. Even strong companies have been thrown out with the bath water… and may continue to be tossed… in the near-term. (In other words, it may take a bit longer for financial companies to be the big winners of Wall Street.)

Ironically, some of the same leaders before the sub-prime mess appear poised to expand on their gains. For example, tech beat people up so badly from 2000-2002, many investors continue to swear off it. Yet the news from Cisco, Google, Apple, HP and more could not be much better, nor could the average price tag (P/E ratio). P/Es for many of the large-cap teach companies are 1/2 what they were in 2000. It follows that a low-cost tech ETF like Vanguard Technology (VGT) may be a smart choice.

In contrast, energy has been the standout for the last 4 years. Shouldn’t investors wish to rotate out into different segments of the economy? Any look at momentum since the Fed cut its discount rate… any belief that crude remains above $50 per barrel… and Big Energy is still worthy of allocation. The easiest and simplest ETF choice remains the S&P Spider Energy Index (XLE).

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.