The Fed Just Lowered Interest Rates. Here's My Top Vanguard ETF to Buy Now.

The Federal Reserve announced its first rate cut in over four years . More rate cuts could follow and bring down borrowing costs, which could spur consumer spending on goods and services.

The Conference Board's Consumer Confidence Index just posted its largest one-month decline since August 2021, so lower interest rates won't magically flip a switch and lead consumers to go on a buying spree. But over time, lower interest rates could help the consumer discretionary sector, which was hit hard by inflation and higher rates.

A natural way to invest in a rebound in the sector is through an exchange-traded fund (ETF), like the Vanguard Consumer Discretionary ETF (NYSEMKT: VCR) . Here's why the low-cost ETF is worth buying now.

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A primer on the ETF

Vanguard offers ETFs for all 11 stock market sectors . Its Consumer Discretionary ETF has an expense ratio of just 0.1%, a minimum investment of $1, and a yield of 0.8%. Consumer discretionary was one of the worst-performing sectors in 2024 until recent months. Now, the Vanguard Consumer Discretionary ETF is on the cusp of surpassing its all-time high from late 2021.

The sector covers a wide variety of industries, including online and brick-and-mortar retail, home improvement, homebuilders, car companies, hotels, resorts, cruise lines, restaurants, and more. The sector is quite different than consumer staples, which focuses on basic essentials. Discretionary companies are generally more growth-oriented, while consumer staples companies are more value- and income-oriented.

From cyclical headwinds to potential cyclical tailwinds

The top 10 holdings of the Vanguard Consumer Discretionary ETF indicate what to expect from the fund. However, you may be surprised to learn that Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA) are the two highest-weighted holdings.

Although those two are sometimes seen as technology companies, a key part of Amazon's business is selling goods online, while Tesla makes money selling cars -- which are textbook consumer discretionary industries. However, Amazon Web Services and Tesla's potential in robotics, automation, and artificial intelligence could be the more valuable aspects of each business longer-term.

Data source: Vanguard.

Each of top 10 holdings in the fund would likely benefit from lower interest rates.

Lower borrowing costs could lead to more online and in-store shopping, benefiting Amazon, MercadoLibre, Nike , and TJX Companies.

The auto industry is highly cyclical and can ebb and flow with the broader economy. Lower interest rates reduce financing costs and make it easier for consumers to pay for a big-ticket item like a Tesla vehicle.

New-home sales volumes can rise in lockstep with home improvement spending. Thirty-year mortgage rates have already fallen from 7.8% last Halloween to 6.1% in less than a year. Lower mortgage rates reduce the cost of borrowing and can have several ripple effects that benefit Home Depot and Lowe's .

Lower interest rates can jolt spending on restaurants and travel. Booking Holdings, which owns Priceline, OpenTable, Kayak, and more, thrives when consumers spend money on travel and leisure.

McDonald's and Starbucks have global footprints, especially in North America and Asia. Both companies depend on high-margin food and drink offerings , which consumers may pay up for if they are more confident about their spending power.

In sum, lower interest rates positively impact the sector because they incentivize spending on goods and services.

A useful tool to achieve diversification

The best consumer discretionary companies can use favorable economic conditions to accelerate growth and have what it takes to endure a downturn.

Pricing power and brand awareness are essential elements to why Nike can sell a pair of sneakers at a high margin or why consumers gravitate toward Home Depot and Lowe's for their home improvement needs. However, brands can lose favor due to competition or a lack of innovation.

Investing in an ETF smooths out risk across a variety of companies, which can be especially useful in the consumer discretionary sector. Many investors may prefer the diversification and simplicity that the Vanguard Consumer Discretionary ETF offers.

Another approach is to use the ETF as a baseline foundational holding and then build positions in the individual names you are most confident in that may only have a small weighting in the ETF.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Foelber has positions in Nike and Starbucks and has the following options: long January 2025 $100 calls on Starbucks, short November 2024 $100 calls on Starbucks, and short November 2024 $80 calls on Nike. The Motley Fool has positions in and recommends Amazon, Booking Holdings, Home Depot, MercadoLibre, Nike, Starbucks, and Tesla. The Motley Fool recommends Lowe's Companies and Tjx Companies. The Motley Fool has a disclosure policy .