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Sector ETFs to Win/Lose on Higher Rates

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Vaccine distribution and possibilities of a fat federal spending bill under the Biden administration have led to a rise in economic growth forecasts, which in turn boosted bets over rising inflation and drove treasury yields. The Fed’s ongoing super-dovish monetary policy has also stoked inflation concerns (read: ETFs to Win/Lose Amid Rising Inflationary Bets).

Though the Fed Chair Powell said on Feb 23 that inflation is still ‘soft’, we expect the reflation trade to remain steady in the near term, especially if the Biden administration comes up with the proposed $1.9-trillion stimulus package. The benchmark U.S. treasury yield ended the day at 1.37%, same as the previous day. Investors should note that the month of February started with 1.09% benchmark treasury yield.

Meanwhile, more and more companies are coming up with vaccines. Though new variants of the COVID-19 hit the globe in recent months, researches are going on to tackle the crisis. Some epidemiologists also believe that it is 'possible' the United States is approaching herd immunity as COVID-19 infections fell 77% in six weeks.

Against this backdrop, one should prepare the investing portfolio in a manner that it fights the rising rate concerns. Below we highlight a few sector ETFs that can win/lose in such an environment.

Winners

Financials – First Trust NASDAQ ABA Community Bank Index Fund (QABA - Free Report)

Banks will benefit from the current jump in long-term interest rates. 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.

Energy – SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report)

The faster-than-expected return to normalcy will likely boost economic growth and promote demand for oil and gas. This, in turn, should boost prices of energy, which will be beneficial for exploration and production companies (read: Sector ETFs to Win & Lose on Oil Price Rebound).

Materials – SPDR S&P Metals & Mining ETF (XME - Free Report)

Commodity prices have been on the rise lately on expectations of beefed-up global growth. A softer greenback has also been driving materials and commodity prices. Most commodities ranging from industrial metals to agricultural products have been staging a rally. So, rising rates are not a worry for this sector as manufacturers will get to charge higher for their production (read: Industrial Metal ETFs Rallying Hard).

Losers

Mortgage REIT – VanEck Vectors Mortgage REIT Income ETF (MORT - Free Report)

U.S. mortgage yields went up on rising treasury yields. The 30-year mortgage rates reached 3.000% on Feb 23, 2021, for the first time in 143 days. If the trend continues, this will dull demand for mortgages. Mortgage applications dropped 5.1% from the previous week, according to data from the Mortgage Bankers Association's (MBA) survey for the week ending Feb 12, 2021. Applications to refinance a home loan declined 5%, while mortgage applications to purchase a home dropped 6%.

Utilities – Utilities Select Sector SPDR Fund (XLU - Free Report)

Utilities is a rate-and-debt-sensitive sector which tends to underperform in a rising-rate environment. The underlying MSCI US Investable Market Utilities 25/50 Index of the fund comprises stocks of large, mid, and small-size U.S. companies within the utilities sector. It yields 3.27% annually.

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