The Federal Reserve lifted confidence amid economic uncertainty, sparking optimism in the U.S. stock market. Chair Jerome Powell kept interest rate steady at policy meeting and maintained the Fed’s two-rate cuts projections for this year. The decision was not as hawkish as investors feared, fueling the stock market rally. 

The S&P 500 gained 1.1%, the highest gain on a Fed decision day since July 31, 2024, while the Dow Jones had its best day since March 20, 2024, adding 0.9%. The tech-heavy Nasdaq Composite Index jumped 1.4%. The rally followed weeks of sharp and volatile swings in the U.S. stock market amid escalating trade tensions and concerns over a slowing economy. The S&P 500 wiped out roughly $5.3 trillion in market value from its peak on Feb. 19 to market close on March 13, according to FactSet data (read: Most Corrections Don't Result in Bear Market: ETFs to Buy). 

The massive decline has made the stocks and ETFs cheaper, compelling investors to buy the dip. We have highlighted five ETFs from different zones of the market that are currently undervalued and could generate solid returns in a rising stock market. These are Invesco Nasdaq Biotechnology ETF IBBQ, Invesco S&P 500 Enhanced Value ETF SPVU, SPDR S&P Bank ETF KBE, SPDR S&P Oil & Gas Exploration & Production ETF XOP and SPDR Portfolio S&P 500 High Dividend ETF SPYD.

Fed Fuels Optimism

Although the central bank expects higher inflation and slower economic growth, the Fed chair reassured investors that the potential effect of tariffs on inflation is likely to be short-lived or “transitory,” and recession risks remain low. "The economy seems to be healthy," Powell said.

Higher inflation typically would lead the Fed to keep its key rate elevated or even raise rates. On the other hand, slower growth and higher unemployment would often prompt the Fed to cut rates to stimulate more borrowing and spending, thereby lifting the economy. Fed officials now see the economy accelerating at a pace of just 1.7% this year instead of the 2.1% projected in December (read: ETFs to Hedge Against Volatility Amid Trade & Slowdown Worries).

The S&P 500, which briefly slipped into correction territory last week, is now more than 7% off its record high. The broad market index is also on track to break a four-week losing streak.

How to Choose ETFs?

Using our database, first, we have selected ETFs with a Zacks Rank #1 (Strong Buy) or 2 (Buy). This is because these ranks suggest strengthening fundamentals and superior weighting methodologies that could enable these ETFs to outperform their counterparts in a booming market. Then, we narrowed down the list to funds having a lower P/E ratio of less than 21.04 for the broad market fund SPY.ETFs to Buy

Invesco Nasdaq Biotechnology ETF (IBBQ) – P/E Ratio: 4.12

Invesco Nasdaq Biotechnology ETF offers exposure to the securities listed on the Nasdaq Stock Market that are classified as either biotechnology or pharmaceutical companies. It follows the Nasdaq Biotechnology Index and holds 225 stocks in its basket. Invesco Nasdaq Biotechnology ETF has been able to manage assets worth $41.9 million and trades in an average daily volume of 17,000 shares. It charges 19 bps in annual fees and has a Zacks ETF Rank #2.

Invesco S&P 500 Enhanced Value ETF (SPVU) – P/E Ratio: 11.61

Invesco S&P 500 Enhanced Value ETF follows the S&P 500 Enhanced Value Index, which measures the performance of stocks in the S&P 500 Index that have the highest "value score." The product holds 102 stocks in its basket, with key holdings in financials, energy and communication services. Invesco S&P 500 Enhanced Value ETF has accumulated $94.2 million in AUM while trading in a light average daily volume of 7,000 shares. The product charges 13 bps in annual fees and has a Zacks ETF Rank #2.

SPDR S&P Bank ETF (KBE) – P/E Ratio: 11.99

SPDR S&P Bank ETF offers equal-weight exposure to 95 banking stocks by tracking the S&P Banks Select Industry Index. Regional banks dominate the portfolio with a 70.2% share, while diversified banks, commercial & residential mortgage finance, diversified financial services and asset management & custody banks take the remainder. SPDR S&P Bank ETF has amassed $2.1 billion in its asset base while trading in a heavy volume of 2.3 million shares a day, on average. The product charges 35 bps in annual fees and has a Zacks ETF Rank #2 (read: Time for Bank ETFs?). 
 
SPDR S&P Oil & Gas Exploration & Production ETF (XOP) – P/E Ratio: 12.07

SPDR S&P Oil & Gas Exploration & Production ETF provides exposure to 53 oil and gas exploration and production companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has an AUM of $2.2 billion and trades in an average daily volume of 3.1 million shares. SPDR S&P Oil & Gas Exploration & Production ETF charges 35 bps in fees per year and has a Zacks ETF Rank #2 

SPDR Portfolio S&P 500 High Dividend ETF (SPYD) – P/E Ratio: 14.04

SPDR Portfolio S&P 500 High Dividend ETF provides exposure to stocks with a high level of dividend income and the opportunity for capital appreciation by tracking the S&P 500 High Dividend Index. Holding 78 stocks in its basket, the fund has key holdings in real estate, utilities, consumer staples and financials. SPDR Portfolio S&P 500 High Dividend ETF has AUM of $6.9 billion and trades in an average volume of 880,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #1.

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SPDR S&P 500 ETF (SPY): ETF Research Reports

SPDR S&P Bank ETF (KBE): ETF Research Reports

SPDR S&P Oil & Gas Exploration & Production ETF (XOP): ETF Research Reports

SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports

Invesco S&P 500 Enhanced Value ETF (SPVU): ETF Research Reports

Invesco Nasdaq Biotechnology ETF (IBBQ): ETF Research Reports

This article originally published on Zacks Investment Research (zacks.com).

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