These 3 ETFs Could Shine as Interest Rates Fall

Key Points

• These ETFs have relatively high dividend yields.

• The dividend-paying stocks in these ETFs tend to do well in a lower interest-rate environment.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

The Federal Reserve recently cut its benchmark short-term interest rate by 25 basis points. The central bank cited slowing economic growth, notably on the jobs front. The Fed's mandate to keep the economy and jobs both growing while keeping inflation under control has been challenging lately, making it difficult to determine what the prime rate should be. The current forecast on the economy's direction points to one to two more rate cuts in 2025.

The market celebrated the Fed's action, and certain stocks stand to benefit more than others in a lower interest rate environment. These three exchange-traded funds (ETFs), focused on dividend-paying stocks, should do particularly well since it's more challenging to get adequate income from fixed-income investments like CDs and bonds in a low-rate environment.

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1. Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) tracks the Dow Jones U.S. Dividend 100 Index. Since it invests passively, the ETF has a low 0.06% expense ratio. The underlying index consists of U.S. stocks with high dividend yields and a track record of consistent payments.

The ETF's portfolio had the highest weight, 19.2%, invested in the energy sector, closely followed by consumer staples' 18.8%, as of June 30. Other major sectors include healthcare (15.5%), industrial (12.5%), information technology (9%), financials (8.9%), and consumer discretionary (8.4%). Certain sectors, like consumer staples and healthcare, have results that tend to hold up well in various economic climates. No individual stock made up more than 5% of the portfolio. The largest holdings include familiar names, like AbbVie, Chevron, and Home Depot.

The Schwab U.S. Dividend Equity ETF has a 3.8% yield as of Sept. 18. By comparison, the S&P 500 index has a 1.2% dividend yield.

2. Utilities Select SPDR Fund

The Utilities Select SPDR Fund (NYSEMKT: XLU) tracks the Utilities Sector Index, which consists of the 31 utility companies in the S&P 500. These include electric, water, and gas utility providers, independent power producers, and renewable electricity producers.

The fund doesn't provide diversification across sectors, but utilities have defensive characteristics since people have everyday needs for water, heat, and electricity. Additionally, the sector may have some growth characteristics given the tremendous amount of electricity needed to run data centers for things like artificial intelligence.

The five largest weighted companies in the ETF make up about 40% of the fund. Their weights range from 5.3% to 11.4%.

NextEra Energy has the largest weighting in the ETF, 11.4%, and Constellation Energy follows with an 8.3% weight. Southern Company, Duke Energy, and Vistra have 7.7%, 7.2%, and 5.3% weights, respectively.

The Utilities Select SPDR Fund has a 2.8% yield. And since it tracks an index, it has a low 0.08% expense ratio.

3. Vanguard High Dividend Yield ETF

Vanguard High Dividend Yield ETF (NYSEMKT: VYM) looks to track the FTSE High Dividend Yield Index. It also has a low expense ratio of 0.06%.

The ETF holds 579 stocks across 10 sectors. Financial, industrial, technology, healthcare, and consumer discretionary stocks comprise over 59% of the fund. The financial sector accounts for 21.7% alone.

An array of large-capitalization U.S. stocks makes up the fund. These companies have a proven track record of success throughout the years. Turning to the largest individual stock holdings, Broadcom has a 6.7% weight in the ETF, followed by JPMorgan Chase's 4.1%. ExxonMobil, Johnson & Johnson, and Walmart each have more than a 2% weighting.

The Vanguard High Dividend Yield ETF has a 2.5% yield.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Chevron, Constellation Energy, Home Depot, JPMorgan Chase, NextEra Energy, Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Broadcom, Duke Energy, and Johnson & Johnson. The Motley Fool has a disclosure policy.