Short Rate-Sensitive Securities With These ETFs

The rate-sensitive space fell out of investors’ favor to start 2015 as the Fed gave signals of dialing back its low interest rate policies soon. Though the Fed still holds a patient stance on its policy due to unimpressive inflationary numbers and global growth issues, a six and half-year low unemployment data in February and an improvement in wage growth from a tight spot have lately reignited speculations of a rate hike, thereby leading to rising yields.

The U.S. economy generated a total of 297K jobs in February versus estimates of 240K and the prior month’s tally of 239K. The jobless rate slipped to 5.5% from 5.7% recorded in the prior month and from 6.7% in the year-ago month.

Yields on 10-year Treasury notes rose to around 2.24% at the end of March 6 from 2.11% recorded the day before. Plus, the gap between the yields on short-term (2 years) and longer-term (10-years) notes has widened. Not only this, U.S. bond yields spiked to an eight-year high versus its G-7 cousins as investors are apprehensive that the Fed will hike rates sooner than previously expected.

In this backdrop, investors are pulling their money out of the rater-sensitive sector ETFs and bond markets. However, opportunistic investors could capitalize this environment in the form of inverse ETFs.

Inverse ETFs provide opposite exposure that is a multiple (-1x, -2x or -3x) of the performance of the underlying index using various investment strategies, such as, swaps, futures contracts and other derivative instruments.

Investors should note that equity sectors like utilities and real estate are highly rate sensitive as these have high dividend yields and need to depend greatly on borrowings to keep their operations going.

A rising interest rate environment could trouble these sectors as rising rates leave an adverse impact on financing costs. Moreover, the appeal for the high yielding securities wanes when rising rate possibilities take centre stage  (read: 3 Sector ETFs to Profit from Rising Rates).

ETFs to Consider
 
Given the ascent in yields, investors could play the yield-sensitive sectors by taking a short approach to them. This can be done by investing in the following three inverse ETFs – UltraShort Utilities ETF (SDP), ProShares Short Real Estate ETF (REK) and ProShares Short 20+ Year Treasury ETF (TBF).

SDP in Focus

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