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Rates have been rising fast in the United States over the past few weeks on growing risk appetite and reflationary optimism. Vaccine distribution and upbeat economic data pints gave a material boost to the U.S. treasury yields. As of Jun 1, 2021, the benchmark U.S. treasury yield was 1.62% versus 0.93% noted at the start of the year.
The ISM manufacturing report for May was roughly in line with expectations, showing continued strong growth, rising commodity costs and higher prices. Expectations for job creation is also higher. Economists expect the data of a creation of around 674,000 jobs in the month of May, after April’s read came in below expectations at 266,000, as quoted on CNBC.
Given this, investors must be interested in finding out the ways to weather a sudden jump in the benchmark bond yields and increased inflationary expectations.
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It charges 30 bps in fees. Investors should note that the 30-year Breakeven Inflation Rate was 2.25% in April 2021, up from 1.29% in March 2020.
The underlying Bloomberg Barclays US Floating Rate Note < 5 Years Index comprises of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years. The fund charges 20 bps in fees.
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) )
Value funds normally fare better in a rising-rate environment. Investors should note that value stocks underperform growth stocks in a low-rate environment. With the yield on 10-year Treasuries making an uptrend, there could be shift from momentum to value shares.
Yield curve steepened materially. As of Jun 1, spread between the yield on the benchmark U.S. treasury and the yield on the two-year treasury was 146 basis points. Notably, this spread was 82 bps at the start of the month.
The biggest winner of the steepening yield curve is the banking sector. 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.
Rising rates add strength to the U.S. dollar. This is going to favor small-cap stocks which are more domestically exposed. Since these companies do not have much exposure to the international markets, a higher greenback does not bother their profitability.
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5 ETFs to Play Rising Yields
Rates have been rising fast in the United States over the past few weeks on growing risk appetite and reflationary optimism. Vaccine distribution and upbeat economic data pints gave a material boost to the U.S. treasury yields. As of Jun 1, 2021, the benchmark U.S. treasury yield was 1.62% versus 0.93% noted at the start of the year.
The ISM manufacturing report for May was roughly in line with expectations, showing continued strong growth, rising commodity costs and higher prices. Expectations for job creation is also higher. Economists expect the data of a creation of around 674,000 jobs in the month of May, after April’s read came in below expectations at 266,000, as quoted on CNBC.
Given this, investors must be interested in finding out the ways to weather a sudden jump in the benchmark bond yields and increased inflationary expectations.
For them, below we highlighted a few ETFs.
ETFs in Focus
ProShares Inflation Expectations ETF (RINF - Free Report)
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It charges 30 bps in fees. Investors should note that the 30-year Breakeven Inflation Rate was 2.25% in April 2021, up from 1.29% in March 2020.
iShares Floating Rate Bond ETF (FLOT - Free Report)
The underlying Bloomberg Barclays US Floating Rate Note < 5 Years Index comprises of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years. The fund charges 20 bps in fees.
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) )
Value funds normally fare better in a rising-rate environment. Investors should note that value stocks underperform growth stocks in a low-rate environment. With the yield on 10-year Treasuries making an uptrend, there could be shift from momentum to value shares.
SPDR S&P Bank ETF (KBE - Free Report)
Yield curve steepened materially. As of Jun 1, spread between the yield on the benchmark U.S. treasury and the yield on the two-year treasury was 146 basis points. Notably, this spread was 82 bps at the start of the month.
The biggest winner of the steepening yield curve is the banking sector. 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.
iShares Russell 2000 ETF (IWM - Free Report)
Rising rates add strength to the U.S. dollar. This is going to favor small-cap stocks which are more domestically exposed. Since these companies do not have much exposure to the international markets, a higher greenback does not bother their profitability.
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 >>