February was really volatile for Wall Street. Though the start of the month was upbeat, rising rate worries triggered a crash at month-end. Growing vaccine distribution and hopes of hefty stimulus under the Biden presidency along with a dovish Fed stoked inflationary pressure and boosted long-term treasury yields.
Overall, the S&P 500, the Dow Jones and the Nasdaq Composite added 2.6%, 3.2% and 0.93%, respectively, past month. The tech-heavy Nasdaq was the worst performer among the big three as the bunch of stocks that won during the pandemic-ridden 2020 on low rates and rising rates now are wreaking havoc on the segment. High growth companies’ value normally relies on expected earnings growth and as long-term yields rise, it lowers the present value of companies’ future earnings.
U.S. benchmark Treasury yields started the month with 1.09% while it ended the month at 1.44%, having
hit a high of 1.60% (the maximum in a year) in the final week of the month. Stocks logged a steep selloff in the last week of February. There has been a rout in the bond market too with selloff taking pace while value stocks and economic reopening-friendly stocks gained momentum. Will March See the Repeat of 2013's Taper-Tantrum Ahead?
Such rising rate worries have similarities with the taper tantrum we noticed in 2013. That time the selloff happened due to the Fed’s decision to wrap up the QE measure in a phased manner. Back then, the U.S. 10-year Treasury yields had jumped from 1.60% to about 3% on such fear.
Meanwhile, the FDA authorized the emergency use of the J&J vaccine, making it the third one to get such approval after Pfizer and Moderna. Such a flurry of vaccines will surely bolster the reflationary sentiments in March and make investments laggards while some will come across as the winning bets.
Against this backdrop, below we highlight a few ETFs that could be the winning picks for March.
iShares Russell 2000 Value ETF ( IWN Quick Quote IWN - Free Report)
Small-caps stocks tend to outperform in a growing domestic economy. Back-to-back vaccine authorization and stimulus bets are great positives for the segment. Though small caps got hurt amid rising rate fear in the last week of February (as the Russell 2000 was down 2.9%), it gained about 6.1% past month.
And this is why, honing in on the value spectrum in the small-cap segment would be a great idea in March. Value stocks tend to perform in a rising rate environment. This is especially true given the fund IWN is heavy on Financials – a sector that is a great beneficiary of rising rates.
Invesco QQQ Trust ( QQQ Quick Quote QQQ - Free Report)
This fund is a perfect buy-the-dip play. The tech-heavy Nasdaq calls for a great long-term investment story. The fund houses the world’s most cash-rich stocks like Apple, Microsoft and Amazon. So, even if growth stocks in general depend on cheap money, rising rate worries are more of a threat for smaller companies. Such cash-rich bellwethers wouldn’t feel the brunt that much. Rather these will continue to focus on the growing emergence of disruptive technologies.
Vanguard High Dividend Yield ETF ( VYM Quick Quote VYM - Free Report)
With the 10-year Treasury yield approaching the S&P 500 dividend, income-loving investors would definitely look for other better options. VYM yields 3.00% currently. Plus, the dividend payout scenario has also improved within corporate America (read:
ETFs to Win/Lose Amid Rising Inflationary Bets). iShares U.S. Regional Banks ETF ( IAT Quick Quote IAT - Free Report)
As regional banks fare well in a steepening yield curve environment, IAT has chances of gaining ahead. 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 (read:
Great Rotation From Bonds to Stocks: ETFs to Win). Invesco Senior Loan ETF ( BKLN Quick Quote BKLN - Free Report)
Senior loans are floating rate instruments and thus pay a spread over the benchmark rate like LIBOR, which help in eliminating interest rate risk. This is because when interest rate rises, coupons on senior loans increase while the value of the bonds decline, keeping investments stable. Since these loans are issued by companies with below investment grade credit ratings, they usually pay yields to compensate for the risk.
Given this, senior loans and the related ETFs offer higher yields along with protection against any interest rate rise, making these ideal investments. Further, they carry lower credit risk than most other assets, with a similar level of yield and have low correlations with the other asset classes. Hence, investors can definitely play BKLN, which yields 3.41% annually.
Vanguard Total Stock Market ETF ( VTI Quick Quote VTI - Free Report)
A bet on the total stock market is a prudent decision. Though reflationary trade has set in globally, fears of spread of the new variant of coronavirus is not gone yet. Vaccines’ efficacy against such variants is still in a questionable spot. Thus, one should not ignore fully the chances of a dip in rates ahead. If rates take dive in March, stocks will again soar.
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