Rate Sensitive ETFs to Play Lower Yields

The shocking start of 2016 made investors all over the world jittery, compelling many to shun riskier assets in favor of safe havens. In particular, the China turmoil and lower oil prices raised concerns over the health of the global economy with the contagion spreading into the recovering U.S. economy as well.

As a result, Treasury yields declined sharply. The 10-year Treasury yields are now at 1.70% against 2.24% at the start of the year. And after the dovish comments from the Fed in its latest meeting, the trend of lower yields is likely to continue at least in the near. The central bank cautioned that global slowdown and financial instability could weigh on the slowly recovering U.S. economy and delay the next rates hike, which was expected next month.

Further, a lot of hot money has been flowing into the international markets as Europe, Japan and many other economies have resorted to negative interest rates. This will continue to put pressure on yields in the coming months. An analyst at Guggenheim Partners expects low interest rates for the time being and even a decline ahead if global instability persists, leading investors’ toward the more sheltered government bonds. As a result, the analyst sees 10-year Treasury yields to drop to 1% or perhaps even lower before the end of 2016.

While lower interest rates reflect a slowing economy, it is benefitting the rate-sensitive and high-yield sectors such utilities and real estate. This is because these sectors act as a safe haven in times of market turbulence and concurrently offer higher returns due to their outsized yields.

As a result, investors could make a short-term play on the rate sensitive sectors in the basket form, as these will continue to trade smoothly if interest rates remain muted. Below we have highlighted some ETFs from these sectors that could be an excellent play for investors in the coming weeks:

iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM - ETF report)

This is the most popular mortgage REIT ETF with AUM of $747.2 million and average daily volume of 1.1 million shares. The ETF tracks the FTSE NAREIT All Mortgage Capped Index and holds 37 securities in its basket with large allocations to the top two firms – Annaly Capital (NLY - Analyst Report) and American Capital Agency (AGNC - Analyst Report). These firms collectively make up for 29.8% share while other securities hold less than 8% share. The fund charges investors 48 bps a year in fees and gained over 10% over the past month. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook.
 
iShares U.S. Home Construction ETF (ITB - ETF report)
 
This fund provides a pure play to the home construction sector by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 41 stocks with double-digit allocation to D.R. Horton (DHI - Analyst Report). Homebuilding takes the top spot at 63.1%, followed by 15.6% in building products and 8.7% in home improvement retail. The product has managed $1.5 billion in its asset base and trades in heavy volume of around 4.1 million shares a day on average. The ETF charges 44 bps in annual fees and has added about 5.5% in the year-to-date timeframe. It has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook.
 
Utilities Select Sector SPDR (XLU - ETF report)
 

With AUM of $7.9 billion, this fund provides exposure to a small basket of 31 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top four holdings at 32.6% of assets. Electric utilities takes the top spot in terms of sectors at 57.6%, closely followed by multi utilities (39.1%). The product charges 14 bps in annual fees and sees a heavy volume of more than 13.4 million shares on average. XLU climbed 9.3% over the past one month and has a Zacks ETF Rank of 3 with a Medium risk outlook.
 
Global X SuperDividend U.S. ETF (DIV - ETF report)
 
This fund provides exposure to the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $271.4 million in its asset base while trades in moderate volume of about 74,000 shares. The ETF charges 45 bps in fees per year from investors. Holding 50 securities in its basket, the product is widely diversified across each component as none of these holds more than 3.52% of assets. Further, utilities and REITs are the top two sectors accounting for 30% and 23%, respectively. The product has a high annual dividend yield of 8.55% and has added about 9% so far this year. It has a Zacks ETF Rank of 2 with a Medium risk outlook.
 
First Trust Consumer Staples AlphaDEX Fund (FXG - ETF report)
 
This ETF provides exposure to 41 consumer staples stocks by following an AlphaDEX methodology and ranks stocks in the space by various growth and value factors, eliminating the bottom ranked 25%. It is moderately concentrated across various components with none holding more than 5.86% share. About 39.1% of the portfolio is allocated to food products followed by food & staples retailing (23.5%) and beverages (17.0%). The fund has amassed $2.4 billion in its asset base while sees solid volume of 479,000 shares a day on average. Expense ratio came in at 0.62%. The product is up 7.5% in the trailing one-month period and has a Zacks ETF Rank of 3 with a Medium risk outlook.