How These 4 ETFs Will Benefit From A Rate Hike

Consumer discretionary stocks also seem a good bet in the rising rate scenario. This is because these typically perform well in an improving economy justified by the healing job market, recovering housing market, surging stock market and expanding economic activities. Further cheap fuel is an added advantage for this sector. One exciting pick in this space can be Vanguard Consumer Discretionary ETF (VCR - ETF report), which has a Zacks ETF Rank of 1 or a ‘Strong Buy’ rating with a Medium risk outlook.

This fund follows the MSCI U.S. Investable Market Consumer Discretionary 25/50 Index and holds 384 stocks in its basket. This is the low choice in the space, charging investors just 12 bps in annual fees while volume is also solid at nearly 153,000 shares a day. The product has managed over $2 billion in its asset base so far. It is pretty spread out across sectors and securities with a slight tilt toward Amazon (AMZN - Analyst Report) at 7%, while other firms hold no more than 5.7% share. Internet retail, restaurants, movies and entertainment, and cable & satellite are the top four sectors accounting for over 10% of total assets. VCR has gained 8% so far this year (read: 4 Solid Reasons to Buy Consumer Discretionary ETFs).

Short-Term Treasury

Though the fixed income world is the worst hit by the rising rates scenario, a number of ETFs that employ some niche strategies like iPath US Treasury Steepener ETN (STPP - ETF report) could lead to huge gains. This product directly capitalizes on rising interest rates and performs better when the yield curve is rising. The ETN looks to follow the Barclays US Treasury 2Y/10Y Yield Curve Index, which delivers returns from the steepening of the yield curve through a notional rolling investment in U.S. Treasury note futures contracts.

The fund takes a weighted long position in 2-year Treasury futures contracts and a weighted short position in 10-year Treasury futures contracts. STPP charges 0.75% in fees and expenses while volume is light at around 1,000 shares a day. Additionally, it is an unpopular bond ETF with AUM of just $2.5 million. The note has surged 4.6% in the year-to-date timeframe (read: ETFs & Stocks to Add on Solid Jobs Data).

Negative Duration Bond

Negative duration bond ETFs offer exposure to traditional bonds while at the same time short Treasury bonds using derivatives such as interest-rate swaps, interest-rate options and Treasury futures. The short position will diminish the fund’s actual long duration, resulting in a negative duration. As a result, these bonds could act as a powerful hedge and a money enhancer in a rising rate environment. Currently, there are a couple of negative duration bond ETFs, out of which WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (AGND - ETF report) has AUM of $17.9 million and average daily volume of 13,000 shares.

This ETF tracks the Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration. The benchmark provides long positions in the Barclays US Aggregate Bond Index, which consists of Treasuries, government bonds, corporate bonds, mortgage-backed pass-through securities, commercial MBS & ABS, and short positions in U.S. Treasuries corresponding to a duration exceeding the long portfolio, with duration of approximately negative 5 years. Expense ratio came in at 28 bps. The product has gained 0.3% so far this year.

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Disclosure: None.

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