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Go Long on Rate Sensitive Sectors With These ETFs

Sweta Killa
T. Rowe Price's (TROW) preliminary assets under management for March 2019 up from the prior month on higher investments in total sponsored U.S. mutual funds and other investment portfolios.

The Fed in its latest FOMC meeting surprised investors by being more dovish than expected. Fed Chair Powell said that there will be no further interest rate hikes this year due to signs of softness in the U.S. economy. Additionally, the central bank will stop shrinking its $4 trillion balance sheet by the end of September.

While the Fed statement led to rough trading in the financial sector, it 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 (read: Rate Sensitive ETFs in Focus Ahead of Fed Meeting).

Additionally, global headwinds like a still-to-materialize trade deal, Brexit, geopolitical tensions and global growth worries are making investors jittery, raising the appeal for stocks from these sectors. This is because these often act as a safe haven in times of market turbulence and offer higher returns due to their outsized yields.

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.

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 (read: 10 Best Leveraged ETFs of the 10-Year Bull Market).

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

ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN MORL

MORL seeks to track twice the monthly performance of the MVIS Global Mortgage REITs Index. It has amassed $420.8 million in its asset base while trading in solid average daily volume of about 300,000 shares. The ETN charges 40 bps in annual fees and was up nearly 24.4% so far this year.

ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN MRRL

This note is linked to the monthly compounded 2x leveraged performance of the MVIS US Mortgage REITs Index and charges 40 bps in annual fees. It has AUM of $100.4 million and trades in average daily volume of about 132,000 shares.

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 $134.7 million and average daily volume of about 18,000 shares. URE has expense ratio of 0.95% and has gained 33.7% in the same time frame.

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 $43.7 million and average daily volume of around 41,000 shares. The ETF charges 95 bps in annual fees and has surged 49.4% in the year-to-date timeframe.

X-Links Monthly Pay 2xLeveraged Mortgage REIT ETN REML

It provides a monthly compounded 2x leveraged long exposure to the price return version of the FTSE NAREIT All Mortgage Capped Index. With AUM of $76.5 million, the note trades in lower volume of 35,000 shares and charges 50 bps in annual fees. REML has gained 11.8% in the year-to-date timeframe (read: ETFs vs. ETNs: Why You Need to Know the Difference).

ETRACS Monthly Pay 2xLeveraged MSCI US REIT Index ETN LRET

This ETN is linked to the monthly compounded 2x leveraged performance of MSCI US REIT Index, charging investors 85 bps annually. It is unpopular and illiquid option in the space with AUM of $5.8 million and average daily volume of about 2,000. The note has gained 25.2% this year.

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 $15.4 million in AUM and average trading volume of nearly 5,000 shares per day. The product has gained 21.3% so far this year and has an expense ratio of 0.95%.

Direxion Daily Utilities Bull 3X Shares UTSL

With AUM of $5 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 18,000 shares. The ETF has climbed 32.3 % so far this year.

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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