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ETFs That Tend To Win & Lose When Rates Rises

Sweta Killa
Eagle Bancorp (EGBN) saw a big move last session, as its shares jumped more than 5% on the day, amid huge volumes.

Treasury yields have been surging lately on the back of strong economic data and hawkish Fed comments. The 10-year yield jumped above 3.25% for first time since 2011, sparking fears of inflationary pressure, which would increase the cost of products and dampen consumer spending. This in turn would hurt economic growth, making investors cautious about the longevity of the longest bull run in U.S. equities (read: Yields Are Soaring: Here's How to Short Treasury With ETFs).

However, there are some corners of the market which thrive when interest rates rise if history is any guide. Based on analytics tool Kensho, we have highlighted a few ETFs that have outshined and lagged when the 10-year Treasury note yield rose 25 basis points or more over a span of 30 days. There have been 18 instances of such a rate move happening since 2008. Notably, the 10-year yield surged about 18 basis points to above 3.2% last week.


VanEck Vectors Oil Services ETF OIH

OIH has been the biggest winner, climbing 6.5% in the month of the rising rate environment per Kensho. Rising yield reflects inflationary pressures and thus rise in commodity prices, including oil. Higher oil price is a boon for energy stocks, which derive most of their revenues from selling the crude that they extract. This is because the cost of oil production or extraction remains low as companies look to lock in supply contracts at higher prices. The gap between production cost and selling price keeps on rising when oil price surges even higher, leading to fat profit margins and higher share price.

This fund tracks the MVIS U.S. Listed Oil Services 25 Index, which offers exposure to the companies involved in oil services to the upstream oil sector, including oil equipment, oil services or oil drilling. With AUM of $1.3 billion, it holds 25 stocks in its basket and charges 35 bps in annual fees. The product trades in an average daily volume of 6.4 million shares and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: ETFs Set to Benefit/Lose From Higher Brent Prices).

SPDR S&P Regional Banking ETF KRE

This fund has historically returned 4.9% on average in the one-month period as banks seek to borrow money at short-term rates and lend at long-term rates. If interest rates rise, banks would be able to earn more on lending and pay less on deposits. This will expand net margins and boost banks’ profits. KRE is one of largest and the most-popular ETFs in the banking space with AUM of $5.2 billion and average daily volume of 5.7 million shares. It follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. The product holds 127 securities in its basket and carries a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: U.S. Yields Rise to Multi-Year High: ETFs to Gain & Lose).

United States Oil Fund USO

This ETF generated average returns of 4.5% in a span of 30 days. This is the most-popular and liquid ETF in the oil space with an AUM of $1.7 billion and average daily volume of nearly 19.8 million shares. The fund seeks to match the performance of the spot price of West Texas Intermediate (WTI or U.S. crude). As oil price rises, USO also rise. The ETF has 0.76% in expense ratio.

SPDR S&P Oil & Gas Exploration & Production ETF XOP

This fund historically retuned nearly 3% in the same time frame. It provides exposure to the oil and gas exploration companies by tracking the S&P Oil & Gas Exploration & Production Select Industry Index. It has amassed $3.8 billion and holds 72 securities in its basket. The product trades in volume of 16.4 million shares per day and charges 35 bps in annual fees. It has a Zacks ETF Rank #3 with a High risk outlook.

ETF Losers

United States Natural Gas Fund UNG

This ETF has been the biggest loser, shedding 5.4% on average during 30-day periods of rising rates, according to Kensho. It provides direct exposure to the price of natural gas on a daily basis through futures contracts. It has AUM of $340 million and trades in volume of around 2.5 million shares per day. The fund charges 1.30% in expense ratio (read: U.S. Natural Gas Exports Hit by Tariffs: ETFs in Focus).

VanEck Vectors Junior Gold Miners ETF GDXJ

Gold lost its sheen as higher interest rates diminish the metal’s attractiveness. And acting as leveraged plays on underlying metal prices, metal miners’ losses are more than their bullion cousins. As such, GDXJ historically underperformed in a month’s time of rising rate environment, dropping 4.9%. It tracks the MVIS Global Junior Gold Miners Index and holds 70 stocks in its basket. Canadian firms dominate the fund’s portfolio at 46.4%, though Australia (23.9%) and South Africa (11.9%) round out the top three. The product is by far the largest and most popular in the gold mining space with AUM of $4.3 billion and charges 54 bps in annual fees. It trades in average daily volume of 11.6 million shares.

Market Vectors Gold Mining ETF GDX

Similarly, GDX also lost 4.9% in a month per Kensho. This is the most-popular and actively traded gold miner ETF with AUM of $8.3 billion and average daily volume of around 38.7 million shares. The fund follows the NYSE Arca Gold Miners Index, holding 48 stocks in its basket. Canadian firms account for half of the portfolio, while the United States (16.5%) and Australia (15.9%) round off the top three. The fund charges 53 bps in annual fees (read: Gold Mining ETFs Rise on Demand in India: Will This Last?).

iShares U.S. Home Construction ETF ITB

This ETF saw an average decline of 3.3% in a month of 25 bps rise in rates. This is because higher rates result in tighter lending conditions, making houses less affordable to homebuyers. ITB provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $881.5 million, it holds a basket of 47 stocks while charging 43 bps in annual fees. The product trades in heavy volume of around 2.6 million shares a day on average and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Time to Buy Beaten-Down Homebuilder ETFs?).

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