The Fed just lowered interest rates. Here are my Top Vanguard ETFs to Buy Now.

The Federal Reserve announced its first rate cut in four years. More rate cuts could follow and lower borrowing costs, which could boost consumer spending on goods and services.

The Conference Board’s consumer confidence index just posted its biggest one-month decline since August 2021, so lower interest rates won’t magically flip a switch and get consumers buying. But over time, lower interest rates could help the consumer discretionary sector, which has been hit hard by inflation and higher rates.

A natural way to invest in a sector rally is through an exchange-traded fund (ETF), such as Vanguard Consumer Discretionary ETF (VCR 0.18%). Here’s why the low-cost ETF is worth buying now.

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A primer on ETFs

Vanguard offers ETFs for all 11 stock market sectors. Its consumer discretionary ETF has an expense ratio of just 0.1%, a minimum investment of $1 and a yield of 0.8%. Consumer discretionary was one of the worst performing sectors in 2024 until recent months. Now, the Vanguard Consumer Discretionary ETF is on the verge of surpassing its all-time high since the end of 2021.

The sector covers a wide variety of industries, including online and physical retail, home improvement, home builders, car companies, hotels, resorts, cruise lines, restaurants and more. The sector is quite different from consumer staples, which focuses on basic essentials. Discretionary companies are generally more growth oriented, while consumer staples companies are more value and income oriented.

From cyclical headwinds to cyclical potential tailwinds

The top 10 holdings of the Vanguard Consumer Discretionary ETF indicate what to expect from the fund. However, you might be surprised to learn this Amazon (NASDAQ: AMZN) and adze (NASDAQ:TSLA) are the two holdings with the largest weight.

Although the two are sometimes seen as technology companies, a key part of Amazon’s business is selling goods online, while Tesla makes money from selling cars — which are discretionary consumer manual industries. However, Amazon Web Services and Tesla’s potential in robotics, automation and artificial intelligence could be the more valuable aspects of each business over the longer term.

Data source: Vanguard.

Each of the top 10 holdings in the fund would likely benefit from lower interest rates.

Lower borrowing costs could lead to more online and in-store shopping, benefiting Amazon, MercadoLibre, Nike and TJX.

The auto industry is highly cyclical and can ebb and flow with the broader economy. Lower interest rates lower financing costs and make it easier for consumers to pay for a big-ticket item like a Tesla vehicle.

The volume of new home sales may increase with spending on home improvements. Thirty-year mortgage rates have already fallen from 7.8% last Halloween to 6.1% in less than a year. Lower mortgage rates lower the cost of borrowing and may have more ripple effects that benefit Home Depot and Lowe’s.

Lower interest rates can shake up spending on restaurants and travel. Booking Holdings, which owns Priceline, OpenTable, Kayak and more, thrives when consumers spend money on travel and leisure.

McDonald’s and Starbucks have a global footprint, particularly in North America and Asia. Both companies depend on high-margin food and beverage offerings that consumers can pay for if they are more confident in their spending power.

In conclusion, lower interest rates have a positive impact on the sector as they stimulate spending on goods and services.

A useful tool to achieve diversification

The best consumer discretionary companies can use favorable economic conditions to accelerate growth and have what it takes to weather a downturn.

Pricing power and brand awareness are essential to why Nike can sell a pair of sneakers at a high margin or why consumers gravitate to Home Depot and Lowe’s for their home improvement needs. However, brands can lose favor due to competition or lack of innovation.

Investing in an ETF smooths out risk across a variety of companies, which can be especially useful in the consumer discretionary sector. Many investors may prefer the diversification and simplicity that the Vanguard Consumer Discretionary ETF provides.

Another approach is to use the ETF as your core holding and then build positions in the individual names you are most confident in, which might only have a small weighting in the ETF.