Rate lift-off concerns have flooded the market after the Fed reinstated the December hike talks in its October meeting. Plus, in early November, the Fed chair Janet Yellen noted that the U.S. economy is ‘performing well’ and there is all reason to enact a slower rate hike trajectory in the December meeting should the economy hold the pace.
If this was not enough, bumper U.S. October job report, wherein nonfarm payrolls increase represented the highest advance in 10 months and the unemployment dropped to the lowest level in seven and a half years, buoyed up the December rate hike possibility further.
Quite likely, the investing will wager on the December lift-off and price in the Fed statement in their holdings. Fed Funds future contract on the Chicago Mercantile Exchange is presently pegging the chances of December lift-off at 60%, which was at 52% before Yellen’s comment on Wednesday and only 38% ahead of the October 28 FOMC meeting.
This situation knocked off rate-sensitive sectors in recent sessions. Rates have been marching higher post Fed meeting. Yields on the benchmark 10-year Treasury notes were at 2.34% on November 6, up from 2.05% recorded on October 27.
In this backdrop, high dividend paying sectors including utilities and real estate are in peril given their sensitivity to changes in interest rates. These sectors are capital intensive in nature. As the funds generated from internal sources are not always enough for meeting their requirements, these companies need to access to the debt market highly (read: 3 Sector ETFs to Benefit if Rates Drop).
As a result, a rising rate environment works inversely to these sectors as companies will now have a higher interest obligation. Also, these high-yielding sectors fall out of income-hungry investors’ favor if rates rise. Needless to say, investors would like to stay away from these sectors in the coming weeks, given the ripe December lift-off prospects.
In spite of excusing themselves from these stocks altogether, investors could make a short-term bearish play on the rate-sensitive sectors as these spaces will see choppy trading if interest rates maintain the ascent.
For them, we highlight a few inverse utility and real estate ETFs, any of which could be an intriguing pick in the near term. Notably, the below-mentioned sector ETFs could see a strong surge as the Fed lift-off bets look stronger.
ProShares UltraShort Utilities ETF (SDP)
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $4.2 million in AUM and average trading volume of nearly 3,500 shares per day. The product was up over 9.8% (on November 6, 2015) post U.S. October job reports (read: Utility/REITs ETFs Plunge on Rate Hike Speculation).
ProShares Short Real Estate ETF (REK)
This fund seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes profits when the real estate stocks trend down and is suitable for hedging purposes against the fall of these stocks. The product has amassed $28.3 million in its asset base while volume is moderate at around 150,000 shares a day. REK added 2.6% on November 6, 2015.
ProShares UltraShort Real Estate ETF (SRS)
The fund offers two times inverse exposure to the performance of the Dow Jones U.S. Real Estate Index. It has managed assets worth $27.2 million and trades in moderate volume of more than 65,000 shares. The ETF advanced over 5.7% on November 6, 2015.
Direxion Daily Real Estate Bear 3x ETF (DRV)
This product seeks to deliver three times the inverse performance of MSCI US REIT Index. It has AUM of $11.5 million and average daily volume of around 45,000 shares. The ETF gained over 9.2% on November 6, 2015.
ProShares UltraShort Homebuilders & Supplies ETF (HBZ)
The $1.9 million-fund gives twice the opposite exposure of the daily performance of the Dow Jones U.S. Select Home Construction Index. Since, the housing market is also a rate-sensitive area, investors pinning hopes on the housing market boom, might tread troubled waters for a short while. And this fund could an intriguing bet for them (read: Inside ProShares' Bull & Bear Leveraged Homebuilding ETFs).
As a caveat, investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis. Moreover, the underlying fundamentals of these sectors are strong given the decent U.S. economic growth momentum. So, inverse ETFs on these sectors might be immediate beneficiaries post lift-off, but may see sluggish trading once the move is priced in.
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