An Equity ETF Specifically Targeting a Rising Rate Environment
This article was originally published on ETFTrends.com.
Investors who are worried about the potential negative effects of rising rates on the equity side of their investment portfolio may look to a targeted ETF strategy.
"Most advisors only think about their bond exposure in the context of rising rates. We think you've got equity as well, so we built a product designed to outperform as rates rise," Kieran Kirwan, Director of Investment Strategies for ProShares, said at the 2018 Morningstar Investment Conference.
Specifically, the ProShares Equities for Rising Rates ETF (EQRR) was the first U.S. stock ETF designed to outperform traditional large-cap indices, like the S&P 500, when interest rates rise.
EQRR tries to reflect the performance of the Nasdaq U.S. Large-Cap Equities for Rising Rates Index, which selects 50 components from a universe of the 500 largest companies based on market capitalization listed on the U.S. exchange that have historically outperformed during periods of rising interest rates.
On a quarter-by-quarter basis, the underlying index will target the five most interest rate sensitive industry sectors out of the original universe based on the correlation of weekly sector performance to weekly percentage changes in 10-year U.S. Treasury yields over the prior three-year period. The sector with the highest correlation will have a 30% position in the index, followed by 25% for the second highest, 20% for the third highest, 15% for the fourth highest and 10% for the fifth highest.
"It's a quantitative rules based strategy that selects both sectors and then stocks within those sectors that have historically had a high correlation to rates," Kirwan said.
The ETF currently has a 24.3% tilt toward financials, followed by 22.0% energy, 15.3% basic materials, 13.9% industrials, and 8.4% technology.
Each sector will hold 10 stocks for inclusion, with each stock exhibiting the strongest correlation of over performance compared to the increase in 10-year U.S. Treasury yields based on a weekly observation over the past three years. If there aren’t enough large-cap stocks that meet the requirement, then the index may include top ranked mid-cap stocks.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.
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