5 funds to consider as interest rates fall

Central banks have started cutting interest rates across most major economies, which means it could be time to reassess some of the funds in your investment portfolio, if you haven’t already. But which funds are likely to benefit from falling interest rates?

The Bank of England has delivered 50 basis points worth of cuts already this year, while the Federal Reserve and the European Central Bank (ECB) have reduced their benchmark rates by 75 basis points. Further cuts lie ahead on the horizon too.

The ECB is expected to cut again before the end of the year, and another Fed cut is on the table in December too. The Bank of England looks less likely to make a move in December, but further cuts are expected from all three banks over the course of 2025.

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These could come at a slower pace than previously expected thanks to measures announced in the Autumn Budget and Donald Trump’s return to the White House. See our recent analysis on Trump’s tariffs, for example.

However, the experts at Capital Economics still expect UK rates to have fallen to 3.50% by early 2026. Meanwhile, recent polling from Reuters suggests the federal funds rate could fall to 3.50-3.75% by the end of 2025, based on median results.

With this in mind, we highlight five funds to consider as interest rates fall. The list includes a combination of MoneyWeek favourites and top picks from an industry expert.

Going for gold

The gold price has been enjoying a stellar run, and is up more than 30% year-to-date. Further interest rate cuts could send it higher, as gold becomes more attractive to investors relative to assets like cash (which pay interest) as rates fall.

Gold could also offer a decent hedge if you are concerned about geopolitical risks or the potential for inflation to pick up again, perhaps as a result of the tariffs threatened by Trump. Johanna Kyrklund, group chief investment officer at Schroders, recently suggested investors allocate around 2% of their portfolio to gold.

Most analysts favour physical gold ETCs over synthetic ETFs that use derivative instruments to track the gold price. If you are looking to add a gold ETC to your portfolio, you could consider the Invesco Physical Gold ETC.

Locking in higher government bond yields

Jason Hollands, managing director at wealth management firm Evelyn Partners, suggests investors look to UK and US government bonds.

Although Hollands expects rates to tick down in both countries, he doesn’t think this will take place as rapidly as expected a few months ago – and recent events are creating yield opportunities.

“In the UK, gilt yields surged in reaction to the borrowing and tax raising plans revealed in the first Budget of the new Labour government. And in the US Donald Trump’s victory and Republican clean sweep of Congress raises the prospect of a pro-growth agenda that will also fan inflationary headwinds and see the deficit widen,” he says.

Hollands’ main suggestion is to lock in current government bond yields while they are still relatively high in real terms. “Ten-year gilts are currently yielding 4.37% and ten year Treasuries are yielding 4.29%,” he says. “A low-cost fund for gilt exposure is the iShares Core UK Gilts UCITS ETF, and for US Treasuries the Vanguard US Government Bond Index Fund.”

The case for UK dividends

In a high interest rate environment, many investors favour cash and bonds for income rather than dividend-paying equities. Equities are generally more volatile than bonds, so some feel the additional risk isn’t worth it when you can earn a healthy yield in lower-risk assets.

As rates come down, though, the level of income you can earn from cash and bonds will fall. Against this backdrop, dividends could start to look more attractive by comparison.

The UK offers fertile ground for dividend-hungry investors, and could be worth a look. In its most recent dividend monitor, financial services company Computershare forecast a prospective UK equity yield of 3.7% over the next 12 months.

While this is lower than the yield investors can find in fixed income and cash assets currently, equity investors could benefit if companies manage to grow their dividends over time.

On top of this, a high proportion of UK companies have also been returning cash to shareholders in the form of share buybacks recently. When buybacks are considered, Computershare says the yield on UK equities is closer to 6%.

If you are looking to add a UK income fund to your portfolio, you could consider the iShares UK Dividend UCITS ETF. The fund looks to track the performance of 50 stocks from the higher yielding sub-set of the FTSE 350 Index.

Financials could benefit if rates come down gradually

The financials sector could benefit if the pace of interest rate cuts is slower than initially expected, in Hollands’ view, as this sort of environment would allow banks to continue to make a healthy margin on lending activity.

“Alongside this, in the US, the Republicans favour more financial deregulation and a less aggressive approach to anti-trust measures, which is also positive for financials and might spur an uptick in M&A,” he adds.

Hollands points to the Polar Capital Global Financials Trust as one option to consider, if you would like some exposure to this theme. Around 52% of the portfolio is invested in US companies across financial services, banking and insurance, including names like JP Morgan, Mastercard, Bank of America and Visa.