CGCP and Rate Cuts: Evaluating ETF Turnaround Potential in a Post-Pivot Landscape

The Federal Reserve's cautious approach to monetary policy in 2025 has created a complex landscape for investors. With inflation still elevated and the labor market resilient, the central bank has deferred rate cuts despite market expectations for two 25-basis-point reductions in 2025 and 2026. This uncertainty has left fixed-income and equity markets in a state of flux, with bond-heavy ETFs like the Capital Group Core Plus Income ETF (CGCP) caught in a tug-of-war between the allure of lower borrowing costs and the risks of premature policy easing. For investors, the challenge lies in identifying opportunities in a post-pivot environment where a “soft landing”—a scenario of controlled inflation and sustained growth—is increasingly plausible but not guaranteed.

The Fed's Dilemma and Its Impact on Fixed Income

The Federal Reserve's decision to maintain the federal funds rate at 4.25–4.50% through mid-2025 reflects its dual mandate: to stabilize prices while avoiding a sharp slowdown in employment. While the labor market remains robust, inflation has proven stubbornly persistent, particularly in services and housing. This has forced the Fed to delay cuts, even as market participants increasingly price in a pivot. For bond-focused ETFs like CGCP, this delay has introduced volatility.

CGCP, which invests in a diversified mix of bonds and debt instruments, has seen a mixed performance in 2025, with a year-to-date return of 3.26% and a 12-month return of 4.41%. However, it lags behind the S&P 500, which has surged 7.21% YTD. The ETF's volatility—measured by a daily average movement of 0.164%—is relatively low, but its current drawdown of 0.58% underscores the sensitivity of fixed-income assets to shifting rate expectations.

The ETF's technical indicators, however, offer a glimmer of optimism. Short-term and long-term moving averages are in a bullish crossover, and a Golden Star Signal issued in June suggests potential upside. Yet, a sell signal from a double top formation in late June hints at near-term resistance. Investors must weigh these signals against the Fed's communication strategy, which remains opaque to some extent. The central bank's emphasis on data-dependent decisions means that any rate cut in 2025 will likely be reactive rather than preemptive—a dynamic that could amplify market swings.

Undervalued Sectors in a Rate-Cutting Cycle

While CGCP's prospects are tied to broader monetary policy, its performance also hinges on sector-specific dynamics. Historically, defensive sectors like consumer staples and utilities have thrived during Fed rate cuts, as lower borrowing costs buoy bond prices and stabilize income-generating assets. This pattern is particularly relevant in a soft-landing scenario, where a controlled easing of monetary policy supports growth without triggering a recession.

The consumer staples sector, for instance, has historically outperformed during rate cuts. In 1995, 2001, and 2007, it delivered 4.9%, 1.7%, and 12.5% outperformance against the S&P 500, respectively. Its resilience stems from its focus on essential goods—products that retain demand regardless of economic conditions. Similarly, the utilities sector, with its regulated environment and consistent cash flows, has consistently outperformed in all four major rate-cutting cycles since 1995.

For investors seeking exposure to these sectors, ETFs like XLU, XLP, and VPU offer compelling opportunities. XLU, with a 2.72% dividend yield and a Sharpe ratio of 1.36, and XLP, which mirrors the defensive strength of consumer staples, are particularly attractive. Their low volatility and high risk-adjusted returns make them ideal for portfolios seeking stability during a Fed pivot.

Balancing Risks in a Soft-Landing Scenario

The challenge for investors lies in balancing the potential benefits of rate cuts with the risks of economic missteps. While the Fed's staff projects inflation to return to 2% by 2027, uncertainties around trade policy, fiscal sustainability, and global growth remain. For CGCP, this means that its bond portfolio could benefit from a more accommodative rate environment, but its equity allocations—particularly to semiconductors and energy—remain exposed to sector-specific risks.

Consider, for example, the potential impact of U.S.-China trade tensions on CGCP's holdings in companies like TSMC and Nvidia. A reversal of semiconductor export waivers could disrupt supply chains and erode valuations, indirectly affecting the ETF's performance. Similarly, geopolitical tensions in the Middle East could destabilize energy markets, complicating the Fed's inflationary calculus.

To mitigate these risks, investors should adopt a diversified approach. While CGCP's low-risk profile and controlled movement make it a viable option for income-focused portfolios, it should be complemented with defensive sectors like utilities and consumer staples. This combination leverages the potential for bond price appreciation while hedging against equity-specific volatility.

Conclusion: A Strategic Path Forward

In a post-pivot landscape where the Fed's actions remain data-dependent, the Capital Group Core Plus Income ETF (CGCP) presents a nuanced opportunity. Its bond-heavy structure positions it to benefit from eventual rate cuts, but its mixed performance and technical volatility necessitate careful monitoring. For investors, the key is to balance CGCP's potential with the defensive strength of sectors like consumer staples and utilities.

The coming months will test the Fed's ability to engineer a soft landing. If it succeeds, ETFs like CGCP—and the broader fixed-income market—could see renewed strength. But in a world of persistent uncertainties, prudence and diversification remain the cornerstones of a resilient portfolio. As the central bank's communication strategy evolves, so too must investors' strategies, ensuring they are prepared for both the opportunities and risks of a shifting monetary landscape.