QQQ, IWM, and SPY ETFs brace for a $12 trillion snowball effect

ETFs that track key American equity indices could benefit from over $12 trillion of cash if the Federal Reserve starts cutting interest rates this year. The key ETFs to watch if this situation happens are Invesco QQQ (QQQ), iShares Russell 2000 (IWM), and SPDR S&P 500 Trust (SPY. 

Similarly, the recently launched spot Bitcoin ETFs like IBIT, BTCW, and BRRR will likely benefit if this happens. Analysts at Franklin Templeton and Barrons believe that many fund managers will start adding some of these ETFs to their balanced portfolios. 

pic.twitter.com/mswW8ILrc3

— Franklin Templeton (@FTI_US) January 17, 2024

If the Fed starts cutting interest rates, it will see the trillions of dollars that moved to money market funds rotate back to equities. The estimate is that cash assets have surged to a record high of $8.8 trillion. Most of these gains happened in the past two years as the Fed moved interest rates from zero to the highest point in over two decades. 

Cash Assets Hit Record High 🚨: Assets in money market funds and CDs hit $8.8 Trillion, the highest amount in history. When interest rates eventually head lower, will this cash find its way into the equity markets? pic.twitter.com/EQbY6Vw7kZ

— Barchart (@Barchart) January 19, 2024

Meanwhile, private equity companies ae in a dilemma as their dry powder jumps to over $4.4 trillion. This cash has also jumped as the deal-making industry has gone through a major slowdown because of high-interest rates.

Therefore, taking the $4.4 trillion in the private equity industry and over $8.8 trillion in cash assets, it brings in over $12 trillion that could theoretically move to the stock market. However, in reality, all these funds will not move to equities. 

For one, while the Fed is expected to cut rates, analysts believe that the era of zero rates is over. As such, many investors will likely maintain their cash holdings in the coming months.

However, what is clear is that PE firms are about to make deals. Last week, Blackrock acquired Global Infrastructure Partners in a $12 billion deal. And this week, General Atlantic bought Actis as a bet on infrastructure.

American equities tend to do well when private equity companies are doing deals. Some analysts expect that these firms will offer to buy some undervalued companies. For example, Bain Capital and Hellman & Friedman are competing for DocuSign, a company whose stock has crashed by 80% from its pandemic high.

There are signs that inflows into SPY, QQQ, and IWM. The SPY fund, the biggest ETF in the world, added over $52 billion in cash in 2023. The other two funds also added billions of dollars and the trend could continue.

The post QQQ, IWM, and SPY ETFs brace for a $12 trillion snowball effect appeared first on Invezz