DGT: Federal Reserve’s Eventual Rate Cut Should Act As A Catalyst (NYSEARCA:DGT)

busracavus Investment Thesis SPDR Global Dow ETF (NYSEARCA:DGT) invests in a portfolio of about 150 large-cap global stocks. The fund has a higher concentration of U.S. stocks as these stocks represent over half of its portfolio. DGT’s sectors allocation shows that it has a higher exposure to cyclical sectors than defensive sectors. Fortunately, the global economy appears to be improving. In addition, an eventual rate cut by the Federal Reserve should act as a catalyst to lift DGT’s fund price higher. Therefore, we think investors should take advantage of any pullbacks. Fund Analysis DGT has performed quite well in this bull market DGT has performed quite well since the broader market reached its cyclical low in late 2022. As the chart below illustrates, DGT’s fund price has increased by about 53.0% but still lag the S&P 500 index’s 57.3%. YCharts Many people will wonder how DGT will perform in the second half of 2024 and beyond. This is what we will discuss in the rest of this article. Half of its portfolio belong to U.S. stocks Let us first look at DGT’s portfolio composition by geography. As can be seen from the table below, stocks from the U.S. represent about 52.6% of DGT’s portfolio. This is followed by Japan’s 9.2% and U.K.’s 7.1%. While U.S. stocks represent a large chunk of DGT’s portfolio, we are not particularly concerned. Most of these U.S. stocks have sizable businesses outside of the U.S. already. Therefore, we do not see this as a concern. SPDR Sector allocation is quite balanced Next, we will look at DGT’s sector allocation. As can be seen from the chart below, the fund’s sectors are quite balanced. Only financials sector has a weight exceed 20%. All other sectors have weights below 15%. About 37.2% of its portfolio (financials, consumer discretionary, materials, and real estate sectors) are highly sensitive to business cycle peaks and troughs. In contrast, 20.2% of DGT’s portfolio (health care, utilities, consumer staples sectors) belong to defensive sectors. The rest other sectors belong to sectors that are moderate sensitive to business cycle peaks and troughs. SPDR Since DGT’s portfolio has a higher exposure to cyclical sectors, we need to pay attention to where we are in this economic cycle. The best time to invest in this fund is when the economy is in the trough, or when the economy is climbing out of the trough but not yet reach the peak. Having this in mind, we will evaluate where we are in this global economy cycle. The global economy is improving To evaluate where we are in this economy cycle, we will invite readers to take a look at the global composite PMI. This indicator is a forward economic indicator that helps us to gauge the strength of the economy. A PMI value above 50 means the economy is heading into expansion mode. On the other hand, a value below 50 means the economy is heading towards contraction. As can be seen from the chart below, the global economy has clearly walked out of the low reached in November 2022. Although the ride can be a bit bumpy since late 2022, the global economy is clearly recovering. In fact, global composite PMI reading in May is 53.7. This is much higher than April’s 52.4. This significant improvement is due to accelerating growth in both manufacturing and services. While one may think that this reading is high, it is still much lower than the peak of 58.5 reached in May 2021. Trading Economics We like DGT’s portfolio as it may benefit from the eventual rate cut Since nearly half of DGT’s portfolio includes international stocks, its fund price will inevitably be impacted by currency exchange rates. We can quickly see this relationship in the chart below. This chart basically illustrates how DGT’s fund price has been impacted by the strength of the U.S. dollar. As can be seen from the chart, DGT’s fund price has an inverse correlation to the strength/weakness of the U.S. dollar. As the U.S. dollar strengthens (e.g. when the Federal Reserve raise the rate), DGT’s fund price tend to decline. On the other hand, when the U.S. dollar weakens (e.g. when the Federal Reserve cut the rate), DGT’s fund price tend to move up. YCharts We have been watching closely about when the Federal Reserve will cut the rate. The recent core PCE data is quite welcoming as we see core PCE continue to trend lower. As the chart below shows, core PCE reading in May is 2.6% and this is the lowest we have seen since the first half of 2021. This gives us more confidence that the Federal Reserve will eventually begin a new rate cut cycle this coming fall. A new rate cut cycle usually also means that the U.S. dollar will gradually weaken. This should be quite beneficial to DGT’s fund price especially that the global economy appears to be improving. Trading Economics Investor Takeaway We think DGT will benefit from an improving global economic outlook. An eventual rate cut (we think will happen in Fall 2024) by the Federal Reserve should also act as a catalyst to DGT’s fund price. Therefore, investors may want to take advantage of any pullbacks.

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