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Leveraged Rate Sensitive ETFs in Focus Ahead of Fed Meet

Sweta Killa

All eyes are currently on the FOMC meeting slated later today. Though the Fed is not expected to change interest rates, it will likely lay the foundation for a rate cut this year. In fact, the central bank is widely expected to drop the word “patient” from its statement and open the doors for a cut next month at its policy meeting (read: ETFs Set to Soar on Rate Cuts Signal).

Aggravating trade disputes, global recession fears and bouts of weak data triggered speculation of rate cuts. Fed Chair Jerome Powell at the Conference on Monetary Strategy, Tools and Communications Practice early this month commented that “the Fed is closely monitoring the implications of the trade tensions on the economy and would act as appropriate to sustain the expansion, given a strong labor market and inflation near 2% target.”

Hopes of easing policy have pushed Treasury yields lower, which, in turn, benefited rate-sensitive and high-yield sectors such as utilities and real estate. When interest rates remain steady or decline, these sectors, which are generally known for the income they generate, gain momentum.

Additionally, global headwinds are making investors jittery, raising the appeal for stocks from these sectors. This is because these often act as safe haven in times of market turbulence and offer higher returns due to their outsized yields (read: Forget Trade Fears, Invest in Defensive Sector ETFs).

In such a scenario, investors could make a short-term bullish play on the rate-sensitive sectors as these spaces will continue to trade smoothly if interest rates remain steady or decline in future.

How to Play?

While futures or long-stock approaches are some of the possibilities, leveraged ETFs might be good options. Leveraged ETFs provide exposure that is a multiple (2 or 3 times) of the performance of the underlying sector using various investment strategies such as swaps, futures contracts and other derivative instruments.

Since most of these funds seek to attain their goal on a daily basis, their performance could vary significantly from the inverse performance of the underlying index or benchmark over a longer period when compared to a shorter period (such as, weeks, months or a year) due to the compounding effect.

However, these funds are cheaper options than direct going long or utilizing futures contracts. Given this, investors seeking to capitalize on the steady/declining rate scenario in a short span could consider any of the following ETFs given the bullish outlook for the sectors.

ProShares Ultra Real Estate URE

This fund seeks to deliver two times the daily performance of the Dow Jones U.S. Real Estate Index. It has AUM of $144.8 million and average daily volume of about 19,000 shares. URE has expense ratio of 0.95% and has gained 9.1% in a month.

Direxion Daily MSCI Real Estate Bull 3X Shares DRN

This product seeks to deliver three times the performance of MSCI US REIT Index. It has AUM of $47.4 million and average daily volume of around 41,000 shares. The ETF charges 95 bps in annual fees and has surged 11.3% in a month (read: ETF Strategies to Follow If Fed Cuts Rate).

ProShares Ultra Utilities UPW

This ETF seeks to deliver twice the return of the daily performance of the Dow Jones U.S. Utilities Index. It has $18.5 million in AUM and average trading volume of nearly 4,000 shares per day. The product has gained 4.8% in a month and has an expense ratio of 0.95%.

Direxion Daily Utilities Bull 3X Shares UTSL

With AUM of $7.7 million, this fund offers three times exposure to the performance of the Utilities Select Sector Index. It charges investors annual fee of 95 bps and trades in moderate volume of 19,000 shares. The ETF has climbed 7.4 % over the past month.

Bottom Line

Investors should note that these products are suitable only for short-term traders as these are rebalanced on a daily basis (see: all the Leveraged Equity ETFs here).

Still, for ETF investors who are bullish on the securities of the high-yielding sectors in the near term, any of the above products could make for an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.

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