Prediction: This ETF will rise for the rest of the year

The economy is at a tipping point.

For the first time since 2020, the Federal Reserve is set to cut interest rates. Chairman Jerome Powell believes that inflation has cooled sufficiently and that the central bank must now turn its attention to supporting the labor market, as the unemployment rate has risen by nearly a percentage point from last year.

Over the next year or two, interest rates are likely to fall by two or three percentage points, based on the Fed’s own forecasts, which should have a significant impact on the economy.

Interest rates will fall, which will lower mortgage rates, boosting the housing market. Investors are likely to return from bonds to dividend stocks, and borrowing costs for businesses will fall.

A number of stocks will benefit from interest rate cuts, but one sector looks particularly poised to capitalize.

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Shares of regional banks could rise

Regional banks are among the most cyclical sectors of the stock market, even more so than their larger bank peers.

This is because regional banks are more sensitive to business growth and demand, interest rates and defaults, among other risks that come with banking.

Shares of regional banks collapsed last March as a result of the bank run Silicon Valley and Signature bank caused a wider crisis of regional banks. The sector has gradually recovered from that crisis and is trading slightly below pre-crisis levels.

If the Fed pulls off a so-called “soft landing,” that is, lowering interest rates without pushing the economy into a recession, regional banks are poised to be winners.

Lower rates, by themselves, have a mixed impact on banks’ bottom lines. These tend to lower net interest income by naturally narrowing loan-to-deposit spreads. However, lower interest rates also tend to act as a tailwind for the overall economy and for banks as they encourage borrowing and spending, stimulating demand for new loans and also for there to be fewer defaults in -a healthier economy, which helps banks avoid losses on charges or defaults.

What is unique about the upcoming interest rate cuts is that it is set to occur during a period of economic expansion rather than recession, which is when rate cuts typically occur. The two most recent rounds of cuts occurred during the pandemic and the Great Financial Crisis.

This time, however, the combination of falling interest rates and a strengthening economy could form a strong tailwind for the banking sector. Investors seemed to agree as bank stocks rose when Jerome Powell said the central bank was ready to start cutting rates

1 ETF to take advantage of it

There’s nothing wrong with investing in individual regional banks, but there are many to choose from in the industry, and sifting through them can be difficult and time-consuming.

Because regional banks are subject to the same trends, investing in the regional bank ETF SPDR S&P Regional Banking ETF (KRE 0.86%) it makes more sense.

The ETF holds 141 stocks, and none account for more than 2.5% of its holdings, though more than a dozen stocks contribute at least 2% of the ETF’s value.

Among the fund’s most important holdings are Western Alliance Bancorp, Valley National Bancorpand Columbia banking system. The SPDR S&P Regional Banking ETF also offers an attractive valuation.

The ETF currently trades at a price-to-earnings ratio of just 10.2, excellent value for a sector that is likely to generate growth as interest rates fall. Additionally, the fund currently offers a dividend yield of 2.7%, making it a solid bet for dividend investors.

While the ETF has recovered losses from the regional banking crisis, the fund is still down 27% from its peak, indicating substantial upside potential for the sector.

Why the SPDR S&P Regional Banking ETF is a buy

The combination of low unemployment, a rebound in the housing market and falling interest rates could be a perfect combination for regional bank stocks.

Interest rate cuts will also mitigate losses on some distressed commercial real estate loans, such as the office subsector, but lower rates should encourage broader economic growth, helping to overcome these headwinds. There is still some risk in the sector, but investors are more than compensated for it at a P/E of 10.

While a number of stocks are likely to be winners in a falling rate environment, the KRE ETF looks like one of the easiest ways to grow your portfolio through the end of the year and beyond.