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Go Short on Rate-Sensitive Sectors With ETFs as Rate Rises
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U.S. yields have seen a solid surge on Fed’s tightening policy that will likely take a toll on rate-sensitive high-yield sectors such as utilities and real estate, given their sensitivity to rising interest rates. When interest rates rise, these sectors, generally known for the income they generate, fall out of favor as investors gain similar levels of income without the stock risk (read: 5 Sector ETFs to Tap for Q2).
The 10-year yield hit a three-year high on bets over the steepest Fed tightening in almost three decades. The central bank is expected to follow a more aggressive path in raising rates to fight the 40-year high inflation after raising rates by 25 bps in the latest FOMC meeting. Speaking at a panel hosted by the International Monetary Fund on Apr 21, Jerome Powell signaled a half percentage point rate increase at its May meeting and indicated similar rate rises after that to lower inflation. With inflation running roughly three times the Fed's 2% target, "it is appropriate to be moving a little more quickly," Powell said.
The central bank is also expected to start reducing the balance sheet at a rapid pace at its May meeting. Fed funds futures traders expect the Fed's benchmark rate to rise to 1.80% in July and 2.60% by February from the current 0.33%.
In such a scenario, investors could make a short-term bearish play on the rate-sensitive sectors as these spaces will continue to trade sluggishly if interest rates keep rising.
How to Play?
While futures or short-stock approaches are some possibilities, inverse ETFs might be good options. Inverse ETFs provide opposite exposure that is a multiple (-1, -2 or -3 times) of the performance of the underlying sector using various investment strategies, such as swaps, futures contracts and other derivative instruments.
Since most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark, over a longer period when compared to a shorter period (weeks, months or years) due to the compounding effect (read: 5 Inverse ETFs Enjoying a Rally This Year).
However, these funds are cheaper than direct shorting or utilization of futures contracts. Given this, investors seeking to capitalize on the rising rate scenario in a short span could consider any of the following ETFs, given the bearish outlook for the sectors. Investors should note that each of the products charges 95 bps in annual fees from investors:
ProShares Short Real Estate ETF seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes profits when real estate stocks decline and is suitable for hedging purposes against the fall of these stocks. ProShares Short Real Estate ETF has amassed $9 million in its asset base while volume is light at around 13,000 shares a day.
ProShares UltraShort Real Estate ETF (SRS - Free Report)
ProShares UltraShort Real Estate ETF offers two times inverse exposure to the performance of the Dow Jones U.S. Real Estate Index. It has managed assets worth $18.2 million and charges 95 bps in fees per year. ProShares UltraShort Real Estate ETF trades in an average daily volume of 60,000 shares.
Direxion Daily MSCI Real Estate Bear 3X Shares seeks to deliver three times the inverse performance of MSCI US REIT Index. It has AUM of $26.7 million and an average daily volume of around 94,000 shares. Direxion Daily MSCI Real Estate Bear 3X Shares charges 95 bps in fees per year.
ProShares UltraShort Utilities ETF seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $2.3 million in AUM and an average trading volume of nearly 11,000 shares per day. ProShares UltraShort Utilities ETF charge s95 bps in fees per year from investors.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (read: all Inverse Equity ETFs here).
Still, for ETF investors who are bearish on the securities of the high-yielding sectors in the near term, any of the above products could make for an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world.
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Go Short on Rate-Sensitive Sectors With ETFs as Rate Rises
U.S. yields have seen a solid surge on Fed’s tightening policy that will likely take a toll on rate-sensitive high-yield sectors such as utilities and real estate, given their sensitivity to rising interest rates. When interest rates rise, these sectors, generally known for the income they generate, fall out of favor as investors gain similar levels of income without the stock risk (read: 5 Sector ETFs to Tap for Q2).
The 10-year yield hit a three-year high on bets over the steepest Fed tightening in almost three decades. The central bank is expected to follow a more aggressive path in raising rates to fight the 40-year high inflation after raising rates by 25 bps in the latest FOMC meeting. Speaking at a panel hosted by the International Monetary Fund on Apr 21, Jerome Powell signaled a half percentage point rate increase at its May meeting and indicated similar rate rises after that to lower inflation. With inflation running roughly three times the Fed's 2% target, "it is appropriate to be moving a little more quickly," Powell said.
The central bank is also expected to start reducing the balance sheet at a rapid pace at its May meeting. Fed funds futures traders expect the Fed's benchmark rate to rise to 1.80% in July and 2.60% by February from the current 0.33%.
In such a scenario, investors could make a short-term bearish play on the rate-sensitive sectors as these spaces will continue to trade sluggishly if interest rates keep rising.
How to Play?
While futures or short-stock approaches are some possibilities, inverse ETFs might be good options. Inverse ETFs provide opposite exposure that is a multiple (-1, -2 or -3 times) of the performance of the underlying sector using various investment strategies, such as swaps, futures contracts and other derivative instruments.
Since most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark, over a longer period when compared to a shorter period (weeks, months or years) due to the compounding effect (read: 5 Inverse ETFs Enjoying a Rally This Year).
However, these funds are cheaper than direct shorting or utilization of futures contracts. Given this, investors seeking to capitalize on the rising rate scenario in a short span could consider any of the following ETFs, given the bearish outlook for the sectors. Investors should note that each of the products charges 95 bps in annual fees from investors:
ProShares Short Real Estate ETF (REK - Free Report)
ProShares Short Real Estate ETF seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes profits when real estate stocks decline and is suitable for hedging purposes against the fall of these stocks. ProShares Short Real Estate ETF has amassed $9 million in its asset base while volume is light at around 13,000 shares a day.
ProShares UltraShort Real Estate ETF (SRS - Free Report)
ProShares UltraShort Real Estate ETF offers two times inverse exposure to the performance of the Dow Jones U.S. Real Estate Index. It has managed assets worth $18.2 million and charges 95 bps in fees per year. ProShares UltraShort Real Estate ETF trades in an average daily volume of 60,000 shares.
Direxion Daily MSCI Real Estate Bear 3X Shares (DRV - Free Report)
Direxion Daily MSCI Real Estate Bear 3X Shares seeks to deliver three times the inverse performance of MSCI US REIT Index. It has AUM of $26.7 million and an average daily volume of around 94,000 shares. Direxion Daily MSCI Real Estate Bear 3X Shares charges 95 bps in fees per year.
ProShares UltraShort Utilities ETF (SDP - Free Report)
ProShares UltraShort Utilities ETF seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $2.3 million in AUM and an average trading volume of nearly 11,000 shares per day. ProShares UltraShort Utilities ETF charge s95 bps in fees per year from investors.
Bottom Line
Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (read: all Inverse Equity ETFs here).
Still, for ETF investors who are bearish on the securities of the high-yielding sectors in the near term, any of the above products could make for an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the “trend is the friend” in this corner of the investing world.