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Buy These ETFs if U.S. Yield Curve Flattens Further

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One of most-watched gauges for an impending recession is the inversion of yield curve. Investors should note that the spread between the two-month and 10-year U.S. Treasury note yield slipped to the negative territory on Jan 30, spooking market watchers globally. The inversion happened for the first time since October (read: Economic Slowdown in 2020? ETF Strategies to Help You).

Global growth apprehensions as evident from the latest IMF projections and outbreak of coronavirus marred the risk-on sentiments. Asian stocks logged a six-day losing streak while fears of contagion hurt global stocks too. This in turn boosted demand for safe-haven assets like U.S. treasuries and gold (read: 5 Gold ETFs Riding the Safe Haven Rally).

The benchmark 10-year U.S. Treasury yield slumped to 1.57% on Jan 30, 2020 from 1.88% at the start of the year. Meanwhile, the two-month U.S. treasury yield rose to 1.58% from 1.55% at the start of January. The spread between the two treasuries fell from 33 bps to minus one bps on Jan 30.

This kind of flattening yield curve is negative for financial stocks. Since banks borrow money at short-term rates and lend capital at long-term rates, a lower long-term rate does not bode well. If the yield curve flattens, net interest rate margins of banks decline. This clearly explains the underperformance of banks or overall financial ETFs.

Inverse Financial ETFs

Though we do not expect further flattening in the yield curve, everything depends on the spread of coronavirus and demand for the risk-free assets. Still, if the bearish situation persists, the appeal for financial ETFs, especially banks, will be dull for the near term.

As a result, investors who are bearish on the sector now may want to consider a near-term short. There are several inverse financial ETFs to play this kind of a flattening yield curve scenario. Below we highlight a few of them.

ProShares Short Financials ETF (SEF - Free Report)

This fund provides unleveraged inverse (or opposite) exposure to the daily performance of the Dow Jones U.S. Financials Index. The ETF makes a profit when the financial stocks decline and is suitable for hedging purposes against the fall of these stocks.

ProShares UltraShort Financials ETF (SKF - Free Report)

This fund seeks two times (2x) leveraged inverse exposure to the Dow Jones U.S. Financials Index.

ProShares UltraPro Short Financial Select Sector ETF

Investors having a more bearish view and higher risk appetite may find FINZ interesting as the fund provides three times (3x) inverse exposure to the S&P Financial Select Sector Index.

Direxion Daily Financial Bear 3x Shares ETF (FAZ - Free Report)

This product provides three times inverse exposure to the Russell 1000 Financial Services Index.
Direxion Daily Regional Banks Bear 3x Shares

This fund seeks to deliver thrice the inverse return of the S&P Regional Banks Select Industry Index.

Bottom Line

As a caveat, investors should note that such products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the financial sector for the near term, either of the above products could make an interesting choice (see: all the Inverse Equity ETFs here).

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