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‘Beaten Down’ ETF Is a Way to Play Inverted Curve, BofA Says

Ksenia Galouchko

(Bloomberg) -- Investors terrified of the yield curve inversion may find solace in exchange-traded funds, according to Bank of America Corp.

Strategist Mary Ann Bartels recommends ETFs focused on technology and energy stocks -- industries that have beaten the broader equity market following past bond inversions, a notorious harbinger of U.S. recessions.

Energy stocks have an especially strong track record of outperformance following yield flips, and the fact that they’ve been “beaten down” should provide some cushion to any potential market weakness, according to Bartels. She recommends the Energy Select Sector SPDR Fund, or XLE, as the best way to gain exposure to the industry. Since 1965, the sector has outpaced the broader equity market 80% of the time in the 12 months that followed yield curve inversions, the study showed.

The energy ETF rose about 14% in the 12 months after the 2005 yield inversion, beating the S&P 500 Index, and is down about 10% in August.

Although not as successfully as energy, the tech sector has on average brushed off inversions and outperformed equities. And thanks to its exposure to growth and momentum factors, the industry is likely to continue to do so, according to the strategist. She recommends the Vanguard Information Technology ETF, known as VGT, which has fallen 4.1% so far this month.

In contrast, consumer-discretionary stocks tend to lag the broader equity market following yield curve inversions, the bank said.

(Updates prices.)

--With assistance from Rachel Evans.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, ;Jeremy Herron at jherron8@bloomberg.net, Rita Nazareth, Brendan Walsh

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