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Treasury Yields at New 7-Year High: ETF Strategies to Play

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Rising rate concerns have been prevailing from the start of this year. Upbeat economic growth and higher inflationary expectations have already driven the benchmark treasury yields to 3% and went on to score even higher on Oct 4 to touch a fresh seven-year high.

Rising yields will cause selloffs in both equity and bond markets. On Oct 4, SPDR S&P 500 ETF (SPY - Free Report) , SPDR Dow Jones Industrial Average ETF (DIA - Free Report) , Invesco QQQ ETF (QQQ - Free Report) and iShares 20+ Year Treasury Bond ETF (TLT - Free Report) lost 0.8%, 0.6%, 1.9% and 0.7%, respectively.

The surge in U.S. Treasury yields had a ripple effect globally. Most euro zone bond yields reacted to the rise on Thursday, and shot up to “their highest levels in months in some cases.” The region’s benchmark 10-year bund yield from Germany touched a four-and-half month high.

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. Large-cap financial ETF Financial Select Sector SPDR ETF (XLF - Free Report) added about 0.7% on Oct 3, 2018. We can also 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 - Free Report) 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. 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. Plus, shorting U.S. treasuries is also a great option in this type of a volatile environment.

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) (up 0.8% on Oct 4), ProShares Short High Yield (SJB) (up 0.4%) and iPath US Treasury 10-year Bear ETN (up 1.3%) (read: 8 Inverse Bond ETFs to Profit Out of Rising Yields).

High Dividend ETFs to Rescue

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

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