Federal Reserve Chair Jerome Powell kicked off the new rate cycle era by initiating a 50 basis points cut in interest rates after holding it at a 23-year high for 14 consecutive months since July 2023. 

This marked the first rate cut since 2020 to address slowing economic growth and showed greater confidence in the fact that inflation is moving sustainably toward the 2% target level.

An interest rate cut by the Fed would boost demand in the world's largest economy. Investors seeking to capitalize on this trend could invest in growth ETFs. While there are many ETFs in the space targeting the growth segment, we have highlighted the five most popular options. These have a Zacks ETF Rank #2 (Buy) each, suggesting their continued outperformance. 

These include Vanguard Growth ETF VUG, iShares Russell 1000 Growth ETF IWF, iShares Core S&P U.S. Growth ETF IUSG, iShares Morningstar Growth ETF ILCG and Vanguard Mega Cap Growth ETF MGK.

Low rates are generally favorable for growth stocks as they reduce the cost of borrowing, often needed to finance the expansion of companies. Lower rates typically reduce the attractiveness of fixed-income investments like bonds, leading investors to seek higher returns in the equity markets. Growth stocks, with their potential for high returns, become more appealing to investors in this environment, driving up demand and, consequently, their prices.

More Cuts in Cards

The central bank projects two more rate cuts of 50 bps in its final two meetings this year, due in November and December. It indicates another 100 bps rate cut next year and a 50 bps cut in 2026, which means four rate cuts in 2025 and two in 2026 (read: 5 ETF Zones Set to Benefit When Fed Initiates Rate Cuts).

The rate cut is “a welcome development” and should put the stock market on good footing going forward. This shift in the monetary policy approach aims to support a stable economic environment without triggering a recession or a significant rise in unemployment.

Why Growth?

Growth stocks are associated with high revenue expansion and innovation-driven businesses. They often need capital to fuel expansion, such as investing in new technologies, scaling operations, or pursuing research and development. As such, they may rely on external financing through debt or equity to fund this growth. Lower rates make it cheaper for these companies to access credit, improving their ability to invest in long-term projects. This can accelerate their growth trajectory, further justifying higher valuations.
    
A low-rate environment reduces the cost of capital, increases the present value of future earnings, and shifts investor preferences toward higher-risk, higher-return investments. This combination makes growth stocks, with their potential for substantial future profit, particularly attractive when rates are low. Thus, these stocks often outperform other asset classes, such as value stocks, during such periods.