The Federal Reserve cut interest rates three times at the end of last year, and despite a solid overall year for stocks, investors have been left hanging with zero interest rate cuts so far in 2025. However, that may soon change, with an 87% implied probably of cuts in September after Fed Chairman Powell signaled the potential for cuts at his Jackson Hole speech last week (Source: CME FedWatch). As a result, some interest rate sensitive areas of the market have popped as investors eagerly hold out for their long-awaited cuts. Given the renewed optimism, should we buy the hype or fade the noise for these groups?

Small cap stocks are among the biggest beneficiaries of falling interest rates due to their higher reliance on borrowing and exposure to more floating-rate debt. After lagging large caps for some time, small caps have recently flipped the script. The Russell 2000 (RUT) up 5% over the last month, outpacing the S&P 500 by 3.5%. The index is now less than 4% away from all-time highs after being 29% away earlier this year. This rebound is reflected in the space’s relative strength. The iShares Russell 2000 ETF (IWM) holds in acceptable fund score of 3.21, in addition to a sharply positive score direction of 2.83, highlighting its significant improvement. That said, large caps still lead in strength, with the SPDR S&P 500 ETF Trust (SPY) scoring two points higher at 5.21.

Homebuilders are highly sensitive to changes in interest rates, as lower rates translate to lower mortgage costs and increased housing demand. After underperforming through April, the group has staged a strong rally, with the iShares U.S. Home Construction ETF (ITB) rising 10.3% over the last month. ITB now holds an acceptable fund score 3.49, which is up 2.43 points from its low in mid-June. Although, homebuilders have been dragged down by the larger names in sector such as Lennar (LEN). The equally weighted SPDR S&P Homebuilders ETF (XHB) holds a stronger fund score of 4.90 after completing six consecutive buy signals, making it a stronger fund to look towards.

Interestingly, the bond market has yet to see the same level of bounce as rate sensitive equities. Specifically, the iShares US Core Bond ETF (AGG) has risen a modest 1% over the last month. This lack of improvement is also reflected in the relative strength of the fund, with it holding a weak fund score of 1.66 despite moving to a positive trend in July. Meanwhile, the fixed income group continues to sit in the last place of DALI. So, despite rate sensitive stocks seeing notable improvement, the same cannot be said for bonds. The group is still far off from returning to acceptable territory, even if it’s been ticking higher recently.

Whether the stock market is getting ahead of themselves on cuts is yet to be determined, but interest rates sensitive stocks are certainly an area to keep an eye on given their improvement, especially if the promised rate cuts finally come to fruition. Meanwhile, bonds continue to be laggards, suggesting that optimism is still concentrated in equities for now. Overall, investors should monitor both groups for signs of improvement in the coming months once rates (hopefully) move lower. 

Gasoline (UJ/) now sits at $1.97, down almost 20% from this year’s high and only about $0.10 above the multi-year low it reached in September 2024. Falling oil & gas prices are not a positive development for energy companies and have helped keep the energy sector near the bottom of the DALI rankings for most of 2025. But they are a welcome development for consumers who are paying less at the pump.

There’s no way to know for certain whether energy prices will continue to decline. But, as drivers, almost all of us have inherent exposure to gas prices. So, if you’d prefer to go ahead and “lock in” the relatively low current prices, you can, by taking a long position in gasoline. If the price of gasoline rises, your increased expense at the pump will be offset by an increase in the value of your hedge and if gas prices decline, the decline in value of your hedge will be offset by the lower cost of filling your tank.

Capping Your Gas Exposure 

In years past, the financial instruments tied to the price of gasoline were pretty much limited to futures, which were often inaccessible or impractical for the average investor. However, we now have a myriad of commodity-based ETFs, including the US Gasoline Fund (UGA), which tracks the futures market for gasoline, and offers us a relatively simple method for hedging gasoline exposure that is accessible to retail investors.

We first talked about how using ETFs to hedge against gas prices several years ago, however, the recent uptick in wholesale inflation has prompted a few requests from clients for an update on this technique, which provides a nice discussion point for clients as well as prospects. Regardless of whether the application of such a strategy actually makes sense for any given client, the conversation can only further your brand as an expert in your craft; and so we decided to revisit this topic today. We were reminded of a link a client forwarded to us a couple of years ago that we'll pass along; www.dqydj.net has a "How to Hedge Your Gas?" calculator that utilizes shares of UGA. That site could make your efforts a bit more scalable, but the math is hardly onerous on its own. Naturally the price you pay at the pump on your block has a few added variables above and beyond the price of gasoline futures (state gas taxes, local competition/markup, etc.), but assuming all else is equal, shares of UGA should be a good hedge against a client's gasoline price risk.

Again, there is no advanced math required to determine the exposure to UGA needed to effectively put a "locking gas cap" on a client's gasoline expenses. We'll walk thru it quickly: Let's say you drive 15,000 miles per year and your vehicle gets 25 miles per gallon. If gas prices are $3.38/gallon today (based off EIA's 8/19/24 average retail prices) you need a stockpile of 600 gallons or $2,028 worth of gas to get you through the next year. If your spouse, like most, would balk at the idea of installing a 600-gallon gas tank in your backyard, shares of UGA are perhaps your best alternative for hedging the risk of further increases in gasoline. $1,878 of UGA would effectively hedge your personal risk, with UGA trading around $63.48 this equals about 30 shares of UGA.

Other Considerations

If gas prices fall to $2.50/gallon in your area, you still have shares of UGA with a cost basis of around $3.38 per gallon, and so you will not truly participate in the gas price relief that your neighbors are enjoying, but should gas prices move toward $3.75-$4 per gallon your increased fuel cost will be offset by the appreciation of your UGA shares. If your spouse drives another 10,000 miles per year and your teenagers do as well, you will want to adjust the calculation to reflect that. Also, depending upon the type of account such a hedge is placed within, some consideration of taxable gains in UGA may be appropriate. For your average client, the gains from locking in a lower gas price may not be eye-popping but it provides a welcome topic for discussion outside of the Fed and interest rates and shows off your financial savvy and outside-of-the-box thinking.

Daily Option Ideas for August 28, 2025