Back to top

Image: Bigstock

Citi Foresees a 10% Stock Pullback Likely: ETFs to Save You

Read MoreHide Full Article

The S&P 500, which is up about 75% since March’s bear market,  just saw its longest losing streak in two months. A surprise increase in the number of Americans applying for jobless benefits in the latest week weighed on the risk-on outlook. Plus, there has been a rise in bond yields, which is a negative for equities.

The 10-year U.S. Treasury yield rose above 1.3% for the first time in nearly a year on Feb 16. The benchmark yield, reached 1.309%, its highest level since Feb 27, 2020, when the coronavirus pandemic just started impacting the investing world.

In fact, the 10-year Treasury yield marked the biggest daily jump (10 bps) on Feb 16 in more than three months. The 30-year U.S. yield also rose, touching a one-year high of 2.095% on Feb 16. The benchmark bond yield closed last week at 1.34%, giving cues of a rising rate environment.

Amazing rallies in bitcoin and the explosion of special purpose acquisition companies (SPACs), an ultra-easy monetary policy and fiscal stimulus have boosted risk-on rally of late which can falter if rates keep rising on higher inflation expectations (read: Inverse Treasury ETFs to Win as Yields Jump).

Citi Sees 10% Pullback in Equities

Citi strategists said in a report lately that a 10% pullback “seems very plausible,” noting that “if rising bond yields drag down some mega-cap IT growth names... that will impact the broad index as a result of the over-representation of such stocks,” as quoted on Reuters. Analysts at Nomura, in the meanwhile, said that yield above 1.5% on the 10-year bonds could trigger an 8% decline in stocks.

FAAMG (Facebook, Apple, Amazon, Microsoft and Google) and Tesla make up about 25% of the returns of the S&P 500 index. These stocks take about 41% of the Nasdaq-100. So, no wonder, if growth stocks start faltering amid rising rates, these have the power to a cause a crash in the high-flying market. Still-ailing job market may also derail the market momentum.

Still, U.S. businesses have seen the strongest expansion in almost six years in February, per a HIS Markit PMI, as quoted on MarketWatch. There are hopes of a fatter fiscal stimulus under the Biden presidency. There are also growing expectations that the global vaccination program will bolster economic recovery in the second half of 2021. These support the continuation of the equity rally.

How to Trade the Skittish Yet Positive Environment?

Against this backdrop, we highlight a few ETFs that could help you to stay afloat if there is any slide in the market.

Invesco KBW High Dividend Yield Financial ETF (KBWD - Free Report)

The yield curve has steepened materially, benefitting the banking sector greatly. Bargain hunting also added some gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits. The fund KBWD benefits from rising rates; plus it yields as high as 8.49% annually. Thus, it appears to be a great bet in the current scenario (read: 5 ETFs to Benefit From Treasury Yield Surge).

SPDR Portfolio S&P 500 Value ETF (SPYV - Free Report)

Value stocks tend to perform better in a rising rate environment.  Moreover, financials are the largest part of the value index. This clearly explains why the value index normally outperforms in a rising rate environment (read: Value or Growth: Which ETFs to Play Ahead?).

Amplify Transformational Data Sharing ETF (BLOK - Free Report)

Some investors have been viewing bitcoin as a hedge against inflation. If the theory holds good and mainstream interest for bitcoin remains intact, bitcoin prices will remain steady.  This in turn will support blockchain technology that drives bitcoin trading and benefits BLOK.

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report)

Investors may also seek refuge to high-yielding stocks and ETFs as such high current income will help them withstand if there is any capital loss at all. The fund SPHD yields 4.61% annually.

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>>