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The bond market continued to give out worrying signals that the U.S. economy could be headed for a recession after U.S. Treasury yields inverted again this week. With the Fed enacting the steepest rate hike since 1994 and likely to be aggressive in the coming days on mounting inflation and uncertainties prevailing due to the Russia-Ukraine war, investors piled into value investing.
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties.
But what would be your stance when yield curve is inverted? The yield on the 3-year Treasury yield fell marginally to 3.33%, while the benchmark 10-year Treasury note fell about 5 basis points to 3.28%. The scenario indicates that long-term bond yields are at pressure.
Inversion of yield curve is a tricky scenario because most value ETFs are heavy on financials. Notably, financial stocks have been going through a rough patch with Financial Select Sector SPDR ETF (XLF - Free Report) losing 2.53% on Jun 16. It added only 0.13% in the pre-market session.
As a result, it is better to be choosy now while picking value ETFs. Value ETFs that are less dependent on financials and more focused on other areas like utilities, staples, healthcare and real estate should do well in the current environment.
Against this backdrop, below we highlight a few value sector ETFs that could be beneficial in the current environment.
The utilities sector is a great investment for those seeking yields and safety. It is among the most stable sectors over the long haul and its players are likely to be decent investments. However, it is a rate-sensitive sector as it requires huge infrastructure, which places a massive debt burden and the resultant interest obligation on its operators. This leaves the sector with scope of outperformance in a subdued long-term rate environment. The fund yields 3.01% annually. XLU lost only 1.7% on Jun 16.
The sector is enjoying a few benefits at this moment. Greater spending power in the wake of improving wage growth is helping the consumer segment. Moreover, the sector offers a decent dividend yield, which is needed to beat inflation. Moreover, even if there is stagflation in the U.S. economy, demand for staples like food will be constant. Hence, U.S. staples manufacturers are likely to be safe bets (read: 1970s-Style Stagflation in the Cards? ETF Strategies to Win).
This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles. Research shows that consumer staples companies mostly outperform in times of market turbulence. XLP lost just 0.8% on Jun 16 and yields 2.49% annually.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report)
The healthcare sector is a good defensive investment option. Currently, the Russia-Ukraine war crisis and the Fed’s hawkish stance on rate hikes as well as the pandemic triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot (read: Biggest U.S. Rate Hike Since 1994 in June: 4 ETFs to Win).
Real Estate – Vanguard Real Estate ETF (VNQ)
The sector is known for higher yield. With the homebuilding sector struggling with high prices, higher costs of raw materials and lower availability of land, many will look for rental options. Rents are rising constantly, benefiting the sector. The sector is also rate-sensitive and benefits if long-term bond yields are at pressure. The fund VNQ yields 3.37% annually.
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Yield Curve Inverts: 4 Value Sector ETFs to Play
The bond market continued to give out worrying signals that the U.S. economy could be headed for a recession after U.S. Treasury yields inverted again this week. With the Fed enacting the steepest rate hike since 1994 and likely to be aggressive in the coming days on mounting inflation and uncertainties prevailing due to the Russia-Ukraine war, investors piled into value investing.
Value stocks have a low price-to-book ratio (P/B)— a measure of market cap relative to tangible assets, per a Wall Street Journal article. The lower the price-to-book ratio, the higher the value. This makes them a gem-like bet amid economic uncertainties.
But what would be your stance when yield curve is inverted? The yield on the 3-year Treasury yield fell marginally to 3.33%, while the benchmark 10-year Treasury note fell about 5 basis points to 3.28%. The scenario indicates that long-term bond yields are at pressure.
Inversion of yield curve is a tricky scenario because most value ETFs are heavy on financials. Notably, financial stocks have been going through a rough patch with Financial Select Sector SPDR ETF (XLF - Free Report) losing 2.53% on Jun 16. It added only 0.13% in the pre-market session.
As a result, it is better to be choosy now while picking value ETFs. Value ETFs that are less dependent on financials and more focused on other areas like utilities, staples, healthcare and real estate should do well in the current environment.
Against this backdrop, below we highlight a few value sector ETFs that could be beneficial in the current environment.
Utilities – Utilities Select Sector SPDR ETF (XLU - Free Report)
The utilities sector is a great investment for those seeking yields and safety. It is among the most stable sectors over the long haul and its players are likely to be decent investments. However, it is a rate-sensitive sector as it requires huge infrastructure, which places a massive debt burden and the resultant interest obligation on its operators. This leaves the sector with scope of outperformance in a subdued long-term rate environment. The fund yields 3.01% annually. XLU lost only 1.7% on Jun 16.
Consumer Staples – Consumer Staples Select Sector SPDR ETF (XLP - Free Report)
The sector is enjoying a few benefits at this moment. Greater spending power in the wake of improving wage growth is helping the consumer segment. Moreover, the sector offers a decent dividend yield, which is needed to beat inflation. Moreover, even if there is stagflation in the U.S. economy, demand for staples like food will be constant. Hence, U.S. staples manufacturers are likely to be safe bets (read: 1970s-Style Stagflation in the Cards? ETF Strategies to Win).
This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles. Research shows that consumer staples companies mostly outperform in times of market turbulence. XLP lost just 0.8% on Jun 16 and yields 2.49% annually.
Healthcare – Health Care Select Sector SPDR ETF (XLV - Free Report)
The healthcare sector is a good defensive investment option. Currently, the Russia-Ukraine war crisis and the Fed’s hawkish stance on rate hikes as well as the pandemic triggered a race to introduce vaccines, tests and treatment options, placing the healthcare sector in a sweet spot (read: Biggest U.S. Rate Hike Since 1994 in June: 4 ETFs to Win).
Real Estate – Vanguard Real Estate ETF (VNQ)
The sector is known for higher yield. With the homebuilding sector struggling with high prices, higher costs of raw materials and lower availability of land, many will look for rental options. Rents are rising constantly, benefiting the sector. The sector is also rate-sensitive and benefits if long-term bond yields are at pressure. The fund VNQ yields 3.37% annually.