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It’s almost certain that the U.S. Federal Reserve Board will lower interest rates at its next meeting at the end of the month. The only question is whether the drop will be a quarter of a percentage point or a half point.

The Bank of Canada isn’t ready to follow the Fed down, at least not yet, but any further rate increases this year are unlikely, if for no other reason that such a move would push the rising loonie even higher, making life more difficult for exporters.

How things have changed in the past 12 months. Last year at this time, both the Bank of Canada and the Fed were determined to push up rates to what they considered more “normal” levels. But U.S. President Donald Trump’s trade wars and a December stock market plunge changed things. Almost overnight, the central banks turned dovish and real-world interest rates started to come down.

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All this is great news for interest-sensitive securities, such as utilities and many dividend-paying equities. The exchange-traded funds that invest in these stocks have seen a dramatic turnaround in their fortunes. Here are three ETFs I like right now.

BMO Equal Weight Utilities Index ETF (ZUT-TSX)

Current price: $18.79

Annual payout: 77.7 cents (trailing 12 months)

Yield: 4.5 per cent

Risk: moderate

Utilities stocks surged after the Fed and the Bank of Canada turned dovish on interest rates. These stocks are highly interest-sensitive, so a falling rate environment will boost share prices significantly.

We’ve seen that in the performance of this ETF. The price hit a 52-week low of $14.90 last Christmas Eve. Shortly after that, we began hearing reports that the Fed was rethinking its interest-rate approach. The units rallied almost immediately and have been heading higher ever since. The price is up 26 per cent since the December low. The monthly distributions have also increased and recently have been running at 6.7 cents per unit.

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Utilities stocks are ideal for income portfolios. They offer steady cash flow, increasing dividends and stability. There are many good individual stocks available, but if you only want to own one security in the sector, this is one to look at.

BMO U.S. Dividend ETF (ZDY.U-TSX)

Current price: US$25.12

Annual payout: 74 US cents (trailing 12 months)

Yield: 3.2 per cent

Risk: moderate

This ETF has been designed to provide exposure to a yield-weighted portfolio of U.S. dividend-paying stocks. It uses a rules-based methodology that considers the three-year dividend growth rate, yield and payout ratio to choose securities. Although the fund trades on the Toronto Stock Exchange, it is priced in U.S. dollars.

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This has been a good performer. Over the five years to the end of June, it posted an average annualized return of 9.4 per cent. So far in 2019, the gain is 12.6 per cent.

The portfolio has 102 positions, all more or less equally weighted. Top holdings include AT&T Inc., International Business Machines Corp., Philip Morris International Inc., Wells Fargo & Co. and AbbVie Inc.

Monthly distributions this year have been at the rate of 6.3 US cents a unit. If maintained, that would total 75.6 US cents over a full year. The management expense ratio (MER) is 0.33 per cent.

SPDR S&P Dividend ETF (SDY-NYSE)

Current price: US$102.07

Annual payout: US$2.421 (trailing 12 months)

Yield: 2.4 per cent

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Risk: moderate

This ETF from State Street Global Advisors tracks the S&P High Yield Aristocrats Dividend Index.

The portfolio is made up of companies that have increased their dividends annually for at least the past 20 years. They include AT&T, IBM, AbbVie, People’s United Financial Inc. and Old Republic International Corp.

The portfolio is very well balanced by sector, led by industrials (16.8 per cent), financials (16.4 per cent), consumer staples (15.4 per cent), utilities (10.4 per cent) and materials (9.1 per cent). Distributions are paid quarterly and will vary, with the largest payout coming in December. The MER is a reasonable 0.35 per cent.

All these funds are fully exposed to the stock market, so they would be vulnerable if we have a sharp correction. However, historically, dividend stocks tend to hold up better in a declining market, which would tend to cushion the extent of any losses.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe.

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