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Pressure is mounting on the Federal Reserve to keep cutting interest rates, and dividend ETFs like Direxion Daily 20+ Year Treasury Bull 3X Shares (NYSEARCA:TMF), iShares Preferred and Income Securities (NASDAQ:PFF), and Schwab US TIPS ETF (NYSEARCA:SCHP) will be the first in line to benefit. The Justice Department recently served grand-jury subpoenas on the Board of Governors, zeroing in on testimony Charman Jerome Powell gave about the cost of renovating the Fed’s headquarters. Powell quickly released a video message where he said that the probe is not due to his testimony, but instead because the Fed hasn’t yielded to the president’s pressure to lower interest rates.
Whatever the case may be, it isn’t a secret that President Donald Trump wants interest rates much lower than they are today. Powell is expected to be replaced by a Trump appointee this year. If interest rates are indeed set according to Trump’s wishes, we can use his earlier statements to arrive at a ballpark. He has said earlier that he would like to see interest rates at 1% or “maybe” lower than that.
Would that really happen? Perhaps not. But even if interest rates are halved from here, the following ETFs can surge.
Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF)
This ETF is designed precisely to go up when interest rates are cut. It gives you 3x the exposure to long-term U.S. Treasury Bonds, which are perfect assets to hold during a “storm” that forces the Fed to cut aggressively. For example, the TMF ETF surged by over 60% in early 2020, whereas the rest of the market cratered.
The ETF did cede those gains in the coming years as interest rates went straight back up. However, ETF has now bottomed out and has been trading sideways for quite some time. I expect a sharp move upwards once the Fed gets more serious with interest rate cuts, potentially giving you triple-digit gains.
You get a 3.97% dividend yield, though I would warn that the expense ratio at 0.91% is far more than most other ETFs that deal with bonds. This expensiveness is partly due to the leverage being used, but it’s well worth the money if you think aggressive rate cuts are just around the corner.
iShares Preferred and Income Securities (PFF)
The iShares Preferred and Income Securities ETF is a “safer” way to play lower interest rates. This ETF holds preferred assets, which are a hybrid between bonds and stocks and usually carry a par value. PFF’s underlying holdings are issued by various companies, and they are first in line to be paid out if any of the issuing companies ever go bankrupt. Hence, “preferred”. Companies issue shares to raise capital without diluting their control, and it’s a great way to ride declining interest rates.
Preferreds come with very high yields that go above the market average. PFF now yields 6.17%. This is a juicy figure that investors are going to pay more and more for once the risk-free yield declines substantially.
You’re not just getting the yield, though. I expect PFF to climb from $31.6 to over $38 in the next two years if interest rates are halved. There’s plenty of capital to go around, and if inflation remains elevated, PFF will be too attractive to ignore.
Dividends are distributed monthly.
The expense ratio is 0.45%.
Schwab US TIPS ETF (SCHP)
Speaking of inflation, the Schwab US TIPS ETF is meant to protect you from exactly that. If you are less concerned about making money out of lower interest rates and you are instead worried about inflation spiraling out of control if rates go too low, SCHP is just the ETF you’d want to hold.
This ETF holds U.S. Treasury Inflation-Protected Securities (TIPS). These securities come directly from the government. The government is bound to compensate those who hold these securities with a yield that will offset inflation entirely.
So, even if the U.S. somehow faces hyperinflation, you’re going to remain safe. The yield will simply adjust and keep your original principal as-is at maturity. Your money won’t get ahead of the market, but you won’t be set back either. I expect rate cuts to make SCHP worth a lot more, for obvious reasons.
The expense ratio is just 0.03% and you get a monthly payout. The trailing yield is 4.05%.