A Rising Rates ETF Portfolio

ETF Trends

Ten-year Treasury yields are down more than 4% over the past month, but that decline has barely dented the 36.4% year-to-date rate spike.

The reality of rising rate environment is not all bad news for stocks. However, some sectors and asset classes do struggle when rates spike. Investors learned that earlier this year. As 10-year yields made a run to 3%, exchange traded funds holdings master limited partnerships, real estate investment trusts and utilities stocks, among other rate-sensitive fare, were decimated by the specter of what higher borrowing costs could do to the ability of those firms to keep lobbing off juicy dividends. [Are Utilities ETFs Saying Rates are Going to Rise Again?]

Bottom line: Some sectors perform better than others during periods of rising rates and some of those that outperform deliver solid returns, even as rates rise. As we’ve previously noted, ETFs that showed momentum as rates rose earlier this year included the SPDR S&P Regional Bank ETF (KRE) and the PowerShares NASDAQ Internet Portfolio (PNQI) . [Regional Bank ETF Hits New 52-Week High]

“Financial and tech stocks, consumer cyclicals, health-care and industrial stocks each gained during the summer rate rise,” reports Brendan Conway for Barron’s. A Credit Suisse model portfolio of rising rate ETF ideas includes funds such as PNQI, the SPDR S&P Bank ETF (KBE) and the iShares U.S. Aerospace & Defense ETF (ITA) .

Credit Suisse’s ideas for short trades as rates rise are not surprises. That list includes the Market Vectors Gold Miners ETF (GDX) , the iShares Mortgage Real Estate Capped ETF (REM) and the Utilities Select Sector SPDR (XLU), among others, according to Barron’s. Those funds were savagely repudiated after the Federal Reserve introduced tapering into the everyday financial lexicon in May. [Rising Rates Burn mREIT ETFs]

The proof is in the pudding regarding Credit Suisse’s rising rates ETF ideas. Over the past six months, REM and GDX are down 12.9% and 11.3%, respectively while PNQI and KBE are up 38.4% and 20.5%.

Bond ideas included the SPDR Blackstone/GSO Senior Loan ETF (SRLN) and the Pimco Enhanced Short Maturity ETF (MINT) , according to Barron’s.

Sector Performance in Rising Rate Periods

View photo

.

cs

Chart Courtesy: Credit Suisse via Barron’s.

View Comments