As cracks start appearing in the U.S. labor market and the rate-cut talk gains momentum, investors are quietly shifting into historically “dull” but stable sectors like consumer staples, utilities, and real estate. ETFs focused on these sectors are gaining attention as macroeconomic uncertainty increases and yield-hungry investors seek stability with potential upside.
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Fed Signals Shift As Labor Market Wobbles
Recent comments from San Francisco Fed President Mary Daly, as reported by Reuters, underscore the increasing tightrope at the Fed. “Inflation, absent tariffs, has been gradually trending down, and with a slowing economy and ongoing restrictive monetary policy, should continue to do so,” she said, cautioning that once hiring slows significantly, the deterioration could be rapid and painful.
U.S. payroll statistics support her concern: only 73,000 jobs were created in July, and the unemployment rate rose to 4.2%. Revisions lower in earlier months have pulled the three-month average down to a mere 35,000, way short of what the Fed considers healthy.
Even with inflationary pressures from new tariffs, Daly pointed out that core inflation is still cooling, giving the Fed scope to cut rates in the months ahead. Powell and Williams are not there yet, but markets are growing and pricing policy is expected to ease by the end of the year.
Why Defensive ETFs Might Be The Sneak Winner
As interest rates decline, industries with stable cash flows and solid dividends, such as utilities, staples, and real estate, tend to perform better. ETFs that follow these industries become increasingly popular among income-hunting investors, particularly when bond yields decline and equity risk rises.
Consumer staples ETFs own stocks of goods that people require regardless of the mood of the economy. Utilities ETFs track companies with regulated revenues and high dividend yields, making them effective alternatives to bonds in low-rate environments. Real estate ETFs, especially those concentrating on REITs, often experience lower financing costs and potential asset value appreciation.
ETFs To Watch
These are some of the ETFs seeing renewed interest as investors continue to build up their defenses in case a policy shift is announced:
Consumer Staples Select Sector SPDR Fund (NYSE:XLP). This fund follows U.S. consumer staples giants such as Procter & Gamble Co (NYSE:PG), Coca-Cola Co (NYSE:KO), and Walmart Inc (NYSE:WMT). Famous for defensive stability and steady dividends.
iShares Global Consumer Staples ETF (NYSE:KXI): Provides worldwide exposure with holdings such as Nestlé SA (OTCID: NSRGF), Unilever, and PepsiCo Inc (NYSE:PEP)—more diversified exposure to staples strength outside the U.S.
Utilities Select Sector SPDR Fund (NYSE:XLU): A go-to utilities fund with exposure to names such as NextEra Energy Inc (NYSE:NEE), Southern Co. (NYSE:SO), and Duke Energy Corp (NYSE:DUK). Provides a yield of more than 3%, with low volatility.
iShares U.S. Utilities ETF (NYSE:IDU): Slightly more diversified than XLU, it encompasses regulated and diversified utilities, making it a favorite when bond yields decline.
Vanguard Real Estate ETF (NYSE:VNQ): One of the largest REIT ETFs, tracking a wide range of U.S. real estate, ranging from retail to residential to industrial sectors.
Schwab U.S. REIT ETF (NYSE:SCHH): A low-cost option focused solely on REITs, appealing to cost-conscious investors looking to ride the rate-cut tailwind.
The Bottom Line
As everyone waits to see if the Fed will reduce rates, smart money in the ETF space may already be taking action. Defensive sector ETFs, usually described as stodgy in bull times, might be lying low and getting ready to stage their comeback tour. If rates drop and recession angst sets in the coming months, investors sitting in staples, utilities, and REITs might be sleeping best tonight.
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