ETF industry trends: Let the rate cuts begin

Vanguard ETF Industry Perspectives Q3 2024 (10-page PDF) is our in-depth quarterly commentary featuring the latest ETF insights, with analysis of how important trends may affect ETF investors.  

The Fed’s 50-basis-point rate cut—its first cut since before the Fed began raising rates in response to the inflationary spike driven by the COVID-19 pandemic—created a fresh opportunity to look closely at small-cap equities, which historically have outperformed the broader market after rate cuts.

Small-capitalization ETF flows are on the rise—a pattern that has historically coincided with interest rate cuts. Small-cap stocks do tend to outperform, but small-cap indexes don’t all behave the same. It’s best to choose an index with a strategy that’s aligned with your goals. 

With the September 18 cut that lowered the federal funds rate from 5.25%–5.5% to 4.75%–5%, markets entered a new phase of loosening borrowing costs. This will be the first real test for the active core and core-plus fixed income ETFs that launched during the current cycle. An interesting facet of these active ETFs is that many managers didn’t change their risk exposures—namely, duration and credit quality—all that much in the lead-up to the September cut.

Heightened volatility over the third quarter, which included that rate cut, showcased how ETFs can be affected. Bid-ask spreads immediately widened on the Fed’s announcement, reinforcing the need when markets become volatile to follow best trading practices or to avoid trading altogether.

With high volatility also surrounding the global stock market sell-off on August 5, which pulled the Standard & Poor’s 500 Index down by as much as 6%, index fund managers and advisors alike are reminded of the importance of controlling impulses and staying the course.