The Federal Reserve’s Chair Jerome Powell’s term is expiring on May 15, 2026. Donald Trump nominated Kevin Warsh to succeed him, and ETFs like Financial Select Sector SPDR ETF (NYSEARCA:XLF), iShares Core S&P Small-Cap ETF (NYSEARCA:IJR), and iShares US Real Estate ETF (NYSEARCA:IYR), can benefit significantly.
Warsh served on the Fed’s Board of Governors from 2006 to 2011, making him the youngest person ever appointed to that role at age 35. During the 2008 financial crisis, he was part of Ben Bernanke’s inner circle and served as an intermediary with Wall Street. He negotiated survival plans for firms like Morgan Stanley (NYSE:MS | MS Price Prediction). He later resigned from the Fed due to disagreements over its balance sheet expansion policies. Since leaving, he has worked with billionaire investor Stanley Druckenmiller and held academic positions at Stanford’s Hoover Institution.
Considering Donald Trump has nominated him, he’s likely open to the idea of cutting interest rates more. He believes higher growth doesn’t necessarily cause inflation, especially with rising productivity from AI. Markets initially reacted negatively to the nomination, but later warmed up to it. Many feared that the next Fed chair would be a pawn for the White House, someone who would simply lower rates aggressively and stoke inflation. However, Warsh has a more hawkish background and is good for maintaining the image of an independent Fed. Rate cuts will still come, but with more discipline,
Here are the ETFs that may benefit from this:
Financial Select Sector SPDR ETF (XLF)
Warsh’s signature policy stance is an unusual pairing, since he wants to cut interest rates while simultaneously shrinking the Fed’s balance sheet. He argues that a leaner balance sheet will restore conventional monetary policy’s effectiveness. This means that households and small businesses could benefit more from interest rate cuts without significant inflation.
Banks can benefit disproportionately from what Warsh is likely to do. Lower rates boost loan demand and refinancing, and this drives revenue for banks. Trump himself noted that Warsh “certainly wants to cut rates”. If real rates remain positive but trend downward, banks can still earn healthy net interest margins while benefiting from increased lending volume.
The Fed has already begun easing supervisory intensity under Vice Chair for Supervision Michelle Bowman, and Warsh is expected to continue this trajectory.
All of this can lead to XLF outperforming. The ETF carries a rock-bottom expense ratio of just 0.08% and has lots of room to run.
iShares Core S&P Small-Cap ETF (IJR)
Small-cap stocks are very sensitive to interest rate changes. These businesses depend heavily on loans to fund their expansion, and a lower rate will allow them to grow much faster. Roughly one in three companies in small-cap indices carry floating-rate debt, compared to just 6% of S&P 500 companies. Near-zero interest rates from October 2020 to March 2021 caused IJR to soar by 60%. Interest rates that low are unlikely, but you can still expect market-beating gains if Warsh’s policy works.
Over the five Fed rate-cutting cycles since 1990, the Russell 2000 has outperformed the S&P 500 by an average of 700 basis points in the 12 months following rate cuts. Small caps have trailed large caps for much of the past three years precisely because higher interest rates weighed more heavily on smaller firms dependent on floating-rate financing.
Better yet, IJR is one of the cheapest small-cap ETFs you can buy now. It has a 0.06% expense ratio and is already up 7.5% year-to-date.
iShares US Real Estate ETF (IYR)
Buying real estate stocks before interest rate cuts is a no-brainer. Investors have been terrified about investing in real estate companies since 2008, but a lot has changed since then, and the industry is much more resilient than you may think. These companies have survived and paid high dividends through the record interest rate hikes, and as these rates come lower, they can thrive.
The iShares US Real Estate ETF provides broad exposure to America’s real estate sector and holds high-quality, large-cap REITs. Its REIT mix spans almost every sector, from healthcare real estate to tech.
Over nearly five decades, REITs have consistently outpaced broader U.S. stocks following Fed easing cycles, and I believe this time won’t be any different.
Public REITs tend to price in rate expectations faster than private real estate markets, meaning IYR holders could see gains materialize quickly once cuts begin.
The catch is, you do have to pay a little more while holding it. The expense ratio is 0.38%, or $38 per $10,000. The yield of 2.45% still makes IYR worth buying and holding.
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