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The dual effects of another likely Fed rate hike this year and the ongoing reverse QE as well as the European Central Bank’s (ECB) announcement of tapering are likely to push up U.S. Treasury yields in the coming days (read: Fed to Hike in December? Buy Quality ETFs).
Rates have remained at decent levels this year but investors probably need to gear up for a rising rate environment next year. Many will be cautious about their fixed income holdings with this prospect. But beyond that, stocks are also likely to face challenges on gradual cease of cheap money inflows. After all, global stocks have attained heights amid ultra-easy monetary policy.
Plus, high-income securities are likely to underperform if treasury yields stage a sharp increase. This may leave many investors rushing toward stocks or sectors that will benefit from a rising rate environment or less from such an investing backdrop (read: 5 Bond ETFs for a Rate-Proof Portfolio).
Probably this is why, Invesco PowerShares recently filed for a fund PowerShares S&P 500 Rising Rates Portfolio. The expense ratio and ticker code of the fund are yet to be disclosed.
Inside the Newly-Filed Fund
The PowerShares S&P 500 Rising Rates Portfolio looks to track the investment results of the S&P 500 Rising Rates Index. The underlying Index reassigns weights to each security on the S&P 500 index on the basis of a rules-based methodology. The methodology tends to attach greater weight to component securities with relatively higher “positive sensitivity” to interest rates.
As per the prospectus, “the underlying Index calculates that security’s “sensitivity” to interest rates by comparing its monthly performance over the last 60 months (or the life of the security, provided it has at least 36 months of trading history) to the monthly changes during that time period in the 10-year U.S. treasury yield.”
How Does It Fit in a Portfolio?
As already discussed, this kind of interest rate sensitivity could make this proposed fund a great addition for investors worried about rising rates. This is particularly true given the moderate availability of such options in the market to play this trend.
Competition
There are already funds targeting this space, but not many. Fidelity Dividend ETF for Rising Rates (FDRR - Free Report) reflects the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and hike their dividends, and have a positive correlation of returns to increasing 10-year U.S. Treasury yields. The fund charges 29 bps in fees.
PowerShares itself has a product with this kind of investment objective, namely S&P 500 ex-Rate Sensitive Low Volatility ETF (XRLV - Free Report) .The underlying index – the S&P 500 Low Volatility Rate Response Index – consists of 100 components of S&P 500 Index that exhibit both low volatility and low interest rate risk. This fund charges 25 bps in fees (read: December Rate Hike May Boost These ETFs).
So, if the newly-filed fund gets an approval, it may amass considerable investors’ money if PowerShares prices the product appropriately.
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Another Rising Rates ETF on the Way
The dual effects of another likely Fed rate hike this year and the ongoing reverse QE as well as the European Central Bank’s (ECB) announcement of tapering are likely to push up U.S. Treasury yields in the coming days (read: Fed to Hike in December? Buy Quality ETFs).
Rates have remained at decent levels this year but investors probably need to gear up for a rising rate environment next year. Many will be cautious about their fixed income holdings with this prospect. But beyond that, stocks are also likely to face challenges on gradual cease of cheap money inflows. After all, global stocks have attained heights amid ultra-easy monetary policy.
Plus, high-income securities are likely to underperform if treasury yields stage a sharp increase. This may leave many investors rushing toward stocks or sectors that will benefit from a rising rate environment or less from such an investing backdrop (read: 5 Bond ETFs for a Rate-Proof Portfolio).
Probably this is why, Invesco PowerShares recently filed for a fund PowerShares S&P 500 Rising Rates Portfolio. The expense ratio and ticker code of the fund are yet to be disclosed.
Inside the Newly-Filed Fund
The PowerShares S&P 500 Rising Rates Portfolio looks to track the investment results of the S&P 500 Rising Rates Index. The underlying Index reassigns weights to each security on the S&P 500 index on the basis of a rules-based methodology. The methodology tends to attach greater weight to component securities with relatively higher “positive sensitivity” to interest rates.
As per the prospectus, “the underlying Index calculates that security’s “sensitivity” to interest rates by comparing its monthly performance over the last 60 months (or the life of the security, provided it has at least 36 months of trading history) to the monthly changes during that time period in the 10-year U.S. treasury yield.”
How Does It Fit in a Portfolio?
As already discussed, this kind of interest rate sensitivity could make this proposed fund a great addition for investors worried about rising rates. This is particularly true given the moderate availability of such options in the market to play this trend.
Competition
There are already funds targeting this space, but not many. Fidelity Dividend ETF for Rising Rates (FDRR - Free Report) reflects the performance of stocks of large and mid-capitalization dividend-paying companies that are expected to continue to pay and hike their dividends, and have a positive correlation of returns to increasing 10-year U.S. Treasury yields. The fund charges 29 bps in fees.
PowerShares itself has a product with this kind of investment objective, namely S&P 500 ex-Rate Sensitive Low Volatility ETF (XRLV - Free Report) .The underlying index – the S&P 500 Low Volatility Rate Response Index – consists of 100 components of S&P 500 Index that exhibit both low volatility and low interest rate risk. This fund charges 25 bps in fees (read: December Rate Hike May Boost These ETFs).
So, if the newly-filed fund gets an approval, it may amass considerable investors’ money if PowerShares prices the product appropriately.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>