Rising Rates in the Cards? ETFs to Play

Sanghamitra Saha
·4-min read

Bond yields crept higher last week, with the 10-year yield touching a level last reached in June, as quoted on CNBC. The CNBC article indicated that strategists are expecting stimulus, now or after the election. This has boosted the treasury yields.  U.S. economic data points also came in better than expected lately, giving a boost to the treasury yields.

Retail sales in the United States increased 1.9% sequentially in September of 2020, following a 0.6% gain in August and beating forecasts of a 0.7% increase. It marked the biggest rise in three months. Sales of existing homes increased a higher than expected by 9.4% in September to a seasonally adjusted annualized rate of 6.54 million units, according to the National Association of Realtors. Sales were up 20.9% annually.

As far as manufacturing data is concerned, although the growth rate slowed from August's near two-year high, the ISM Manufacturing PMI for the month of September of 2020 marked the 4th consecutive month of expansion in factory activity.

Because of the above-mentioned economic data points and stimulus as well as vaccine and treatment hopes for coronavirus, the spread between five- and 30-year Treasuries touched nearly a four-year high. Corporate debt has traded firm against the rising government rates. This resulted in a steepening yield curve.

Will Rise in Yields Last?

Per a Reuters article, some investors are wagering that current conditions may be apt for a more a sustained move in Treasury yields. This is especially true given that lawmakers “appear ready to deliver more fiscal stimulus in coming months, a vaccine against COVID-19 may come next year, and more U.S. Treasury bond offerings are set to weigh on prices.”

The article noted that net short bets on the 30-year Treasury reached an all-time high earlier this month, reflecting bets that yields would continue to rise on hopes of an economic recovery and rising inflation (read: 5 ETFs Rising as 'Reflation Trade' Picks Up on Stimulus Hope).

Against this backdrop, one can play the below-mentioned ETFs.

ETF Beneficiaries

SPDR S&P Regional Banking ETF KRE

Bank shares in the S&P 500 gained more than 6% last week.  A steepening yield curve is a great scenario for regional banking stocks as these perform well in a rising-rate environment.

iShares Russell 2000 ETF IWM

The segment is likely to benefit no matter who wins the election as Trump supports the “America First” agenda while Biden endorses “Buy American.” This, in turn, would benefit small-cap ETFs as these are heavily dependent on domestic companies. Small-cap Russell 2000 index managed to log a gain versus about a 2% decline for big momentum stocks as a group, per CNBC (read: Trump or Biden, Small-Cap Stocks & ETFs to Gain).

Invesco S&P MidCap 400 Pure Value ETF RFV

Value funds normally fare better in a rising -rate environment. The fund gained about 2.2% last week. Investors should note that value stocks underperform growth stocks in low rate environment. With the yield on 10-year Treasuries marking an uptrend, there could be shift from momentum to value shares.

ProShares Inflation Expectations ETF RINF

The fund looks to provide exposure to 30-year breakeven inflation (a widely followed measure of inflation expectations). According to Wall Street forecaster James Bianco, the backdrop is favorable for an inflation comeback, as quoted on CNBC. 30-year Breakeven Inflation Rate was 1.76% in September 2020, up from 1.71% in August 2020, 1.65% recorded in the year-ago month and a one-year low of 1.29% recorded in March 2020.

Plus, annual consumer price inflation rate in the United States rose to 1.4% in September of 2020 from 1.3% in August, matching the expectations and reaching the highest since March. No wonder, in line with rising inflation, RINF was up 1.1% last week and 4% in the last four weeks.

Real Estate Select Sector SPDR Fund XLRE

In a rising inflation environment, real estate stocks act as a good bet. Both resale value of the property and the rental income rise with the price inflation. Moreover, the fund yields a solid 3.08% annually although it lost 1.3% last week.

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iShares Russell 2000 ETF (IWM): ETF Research Reports
 
ProShares Inflation Expectations ETF (RINF): ETF Research Reports
 
Invesco SP MidCap 400 Pure Value ETF (RFV): ETF Research Reports
 
Real Estate Select Sector SPDR ETF (XLRE): ETF Research Reports
 
SPDR SP Regional Banking ETF (KRE): ETF Research Reports
 
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