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ETF Strategies to Play Rising U.S. Treasury Yields

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Rising rate concerns have been prevailing from the start of September. Decent economic growth and higher inflationary expectations have driven the Federal Reserve to mull over the start of a QE tapering. This, in turn, started to boosting treasury yields.

Federal Reserve Chair Jerome Powell said lately that the central bank could start scaling back asset purchases as soon as November and finish the process by mid-2022. Several officials are even interested to hike interest rates next year.

The announcement of the Fed QE taper may come in the policy gathering on Nov 2-3. However, the Fed chair Powell left the door open to waiting longer should the need be and stressed that tapering is not directly corelated with the timing of rate liftoff.

As a result, benchmark U.S. treasury yield jumped to 1.55% (its highest level since June) on Sep 29 from this month’s low of 1.28% recorded on Sep 14 on the Fed taper cues. The surge in U.S. Treasury yields will likely have a ripple effect globally.

Given this, investors must be interested in finding all possible strategies to weather a sudden jump in the U.S. Treasury yields. For them, below we highlighted a few investing tricks that could gift investors with gains in a rising rate environment.

Tap Regional Banks

Financial stocks are the direct beneficiaries of a rise in long-term bond yields. This time too, there is no exception. We can choose regional bank ETFs like SPDR S&P Regional Banking ETF (KRE - Free Report) as these have a tilt toward smaller-cap stocks and are mainly focused on the U.S. economy. Since banks borrow money at short-term rates and lend the capital at long-term rates, the latest spike in long-term bond yields bode well for these ETFs.

Go Short With Rate-Sensitive Sectors

Needless to say, sectors that perform well in a low interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares UltraShort Real Estate (SRS - Free Report) and ProShares Short Real Estate (REK) are such inverse ETFs that could be wining bets in a rising rate environment.

Still Want Bond Exposure? Look at These ETFs

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds (read: Hedge Rising Rates with Floating Rate ETFs).

Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context.

Another option in this space is to tap bank loan ETFs like Highland/iBoxx Senior Loan ETF (SNLN - Free Report) . Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. These provide capital to companies that have below-investment grade credit ratings. In order to compensate for this high risk, senior loans usually pay higher yields.

Inverse Bond ETFs to Profit

There is a way to cash in on this rising yield trend, in the form of inverse Treasury ETFs like ProShares Short 20+ Year Treasury (TBF - Free Report) and ProShares Short High Yield (SJB).

High Dividend ETFs to Rescue

Investors can seek refuge in even higher-yield securities. So,Invesco S&P 500 High Div Low Volatility ETF (SPHD - Free Report) , yielding about 3.87% annually, can be a nice bet in a rising rate environment.