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These 5 Inverse ETFs Could be Great if Rates Rise Further

Sanghamitra Saha

Rising rate concerns are likely to stay until Trump takes his seat and comes up with definitive policies. After that, the rising rate trajectory may gain more momentum on increased inflationary expectations or slow down if policies come short of investors’ expectations.

So far, Treasury bond yields have been going uphill on hopes of fiscal reflation in Trump’s presidency. Plus, the Fed expedited its sole rate hike of 2016 by a modest 25 bps to 0.50–0.75%, attesting the U.S. economy’s growth momentum and a tightening labor market. If this was not enough, the Fed has now forecast three rate hikes in 2017, up from two guided in September (read: Sole Fed Hike of 2016 Put These ETFs in Focus).

Notable changes were noticed in the projection for the benchmark interest rate for 2017, 2018 and 2019. Projections for 2017, 2018 and 2019 were ticked up from 1.1% to 1.4%, 1.9% to 2.1% and from 2.6% to 2.9%, respectively. These are meaningful increases from the 2016 projected rate of 0.6%. The Fed’s funds rate for the longer run was raised to 3% from 2.9% (read: 9 Winning ETF Ways for Those Who Fears Rising Yields).

As a result, the benchmark treasury yield moved to 2.57% on December 20, 2016 from a low of 1.37% seen in early July. This situation caused a tumult in several corners of the market that is likely to continue in the days to come.

Against this backdrop, we highlight an inverse ETF option from every sector that is likely to underperform if bond yields continue to creep up.

Direxion Daily Gold Miners Index Bear 1x Shares MELT

As soon as bond yields rise and the greenback gains, commodity prices fall. As a result, SPDR Gold Shares GLD tracking the gold bullion dropped over 6.7% in the last one month (as of December 20, 2016).

Gold underperforms in a rising rate environment as the commodity is non-interest bearing. The largest big-cap gold mining ETF VanEck Vectors Gold Miners ETF GDX plunged about 11% in the last one month and thus MELT is a winning proposition (read: Gold ETF: Should You Follow Soros or Go Bottom Fishing?).

Short MSCI Emerging Markets ETF (EUM)                       

Fears of a cease in cheap dollar inflows are likely to hit emerging markets hard, thus opening doors for EUM (read: ETF Winners & Losers as Dollar Hits 13-Year High).

Direxion Daily Homebuilders & Supplies Bear 3x Shares ETF (CLAW)

U.S. homebuilding declined 18.7% in November to a seasonally adjusted annual rate of 1.09 million units, down from a 1.34 million-unit rate noticed in October and economists’ projection of a 1.23 million-unit rate.  The data is enough to short the homebuilding sector at this moment.

UltraShort Utilities ETF SDP

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 operational requirements, these companies need to depend on the debt market highly.

Though utility and real estate have so far stayed afloat in the rising rate environment, things may turn sour if rates rise further. Inverse utility ETF SDP which seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index should thus be followed.

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.

Bottom Line

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 sectors like utility and real estate are strong given the decent U.S. economic growth momentum.

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SPDR-GOLD TRUST (GLD): ETF Research Reports
 
VANECK-GOLD MNR (GDX): ETF Research Reports
 
PRO-ULS UTIL (SDP): ETF Research Reports
 
DIR-D GMI BR1X (MELT): ETF Research Reports
 
PRO-SH REAL EST (REK): ETF Research Reports
 
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