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Rising rate concerns are clearly here to stay with the Fed putting the third rate hike of the year into effect in its September meeting. Chances of the ECB hiking rates are doing rounds as well (read: ECB May Hike Rates After Summer 2019: ETFs to Gain).
In Europe, the Norges Bank raised its key policy rate in September for the first time since 2011.Bank of England lifted interest rates for the second time since the financial crisis in August. Sweden’s Riksbank plans to start raising rates this December or next February.
The Fed raised the benchmark interest rates by a modest 25 bps to 2.00-2.25% in its September meeting (the same as that of in April 2008), confirming the U.S. economy’s growth momentum and the labor market’s well-being. The U.S. central bank continues to predict three more hikes next year and one in 2020.
Against this backdrop, high dividend paying sectors, including utilities and real estate, are in danger given their sensitivity to changes in interest rates. These sectors are capital intensive in nature. As the funds generated from internal sources are not always enough for meeting requirements, these companies considerably depend on the debt market.
As a result, a rising rate environment works against such sectors as companies face a higher interest obligation. Also, these high-yielding sectors fall out of income-hungry investors’ favor if rates rise. Needless to say, investors would like to stay away from these sectors in the coming weeks.
In spite of excusing themselves from these stocks and ETFs altogether, investors could make a short-term bearish play on the rate-sensitive sectors which will see choppy trading if interest rates maintain the ascent.
ETFs to Play
Here we highlight a few inverse utility and real estate ETFs, any of which could be an intriguing pick in the near term.
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. The product was up about 1.1% on Sep 26 (read: ETF Strategies to Play the 7-Year High Benchmark Yield).
This fund seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF profits when the real estate stocks decline, providing hedge against such downturns. REK added 1.4% on Sep 26.
This product seeks to deliver three times the inverse performance of the MSCI US REIT Index. The ETF gained more than 3% on Sep 26.
Bottom Line
As a caveat, these products are suitable only for short-term traders as these are rebalanced on a daily basis. Moreover, the underlying fundamentals of these sectors, especially real estate, are strong given the decent U.S. economic growth momentum. So, inverse ETFs on these sectors might be immediate beneficiaries of a rate hike but may see sluggish trading once the move is priced in.
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Short These Sectors With ETFs as Fed Hikes Again
Rising rate concerns are clearly here to stay with the Fed putting the third rate hike of the year into effect in its September meeting. Chances of the ECB hiking rates are doing rounds as well (read: ECB May Hike Rates After Summer 2019: ETFs to Gain).
In Europe, the Norges Bank raised its key policy rate in September for the first time since 2011.Bank of England lifted interest rates for the second time since the financial crisis in August. Sweden’s Riksbank plans to start raising rates this December or next February.
The Fed raised the benchmark interest rates by a modest 25 bps to 2.00-2.25% in its September meeting (the same as that of in April 2008), confirming the U.S. economy’s growth momentum and the labor market’s well-being. The U.S. central bank continues to predict three more hikes next year and one in 2020.
Against this backdrop, high dividend paying sectors, including utilities and real estate, are in danger given their sensitivity to changes in interest rates. These sectors are capital intensive in nature. As the funds generated from internal sources are not always enough for meeting requirements, these companies considerably depend on the debt market.
As a result, a rising rate environment works against such sectors as companies face a higher interest obligation. Also, these high-yielding sectors fall out of income-hungry investors’ favor if rates rise. Needless to say, investors would like to stay away from these sectors in the coming weeks.
In spite of excusing themselves from these stocks and ETFs altogether, investors could make a short-term bearish play on the rate-sensitive sectors which will see choppy trading if interest rates maintain the ascent.
ETFs to Play
Here we highlight a few inverse utility and real estate ETFs, any of which could be an intriguing pick in the near term.
ProShares UltraShort Utilities (SDP - Free Report)
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. The product was up about 1.1% on Sep 26 (read: ETF Strategies to Play the 7-Year High Benchmark Yield).
ProShares Short Real Estate ETF (REK - Free Report)
This fund seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF profits when the real estate stocks decline, providing hedge against such downturns. REK added 1.4% on Sep 26.
ProShares UltraShort Real Estate (SRS - Free Report)
The fund offers two times inverse exposure to the performance of the Dow Jones U.S. Real Estate Index. The ETF advanced about 2.0% on Sep 26.
Direxion Daily MSCI Real Estate Bear 3X ETF (DRV - Free Report)
This product seeks to deliver three times the inverse performance of the MSCI US REIT Index. The ETF gained more than 3% on Sep 26.
Bottom Line
As a caveat, these products are suitable only for short-term traders as these are rebalanced on a daily basis. Moreover, the underlying fundamentals of these sectors, especially real estate, are strong given the decent U.S. economic growth momentum. So, inverse ETFs on these sectors might be immediate beneficiaries of a rate hike but may see sluggish trading once the move is priced in.
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 >>