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Short Rate-Sensitive Sectors With These ETFs

U.S. yields surged in recent weeks, driven by an aggressive rate hike by the Fed. This will likely take a toll on the rate-sensitive, high-yield sectors such as utilities and real estate. When interest rates rise, these sectors, known for the income they generate, fall out of favor as investors gain similar levels of income without any stock risk (read: Time to Buy Cash-Like ETFs?).

In such a scenario, investors could make a short-term bearish play on the rate-sensitive sectors as they continue to trade sluggishly if interest rates keep rising. While futures or short-stock approaches are some possibilities, inverse ETFs like ProShares Short Real Estate ETF REK, ProShares UltraShort Real Estate ETF SRS, Direxion Daily MSCI Real Estate Bear 3X Shares DRV and ProShares UltraShort Utilities ETF SDP might be good options.

Inverse ETFs provide opposite exposure that is a multiple (-1, -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 (weeks, months or years) due to the compounding effect.

However, these funds are cheaper than direct shorting or utilization of futures contracts. Given this, investors seeking to capitalize on the rising rate scenario in a short span could consider any of the following ETFs, given the bearish outlook for the sectors. Investors should note that each of the products charges 95 bps in annual fees from investors.

Inside Higher Rates

The 10-year yields hit the highest level of 3.363% since Jun 16. while 2-year yields are hovering near their highest level seen in 2007. The 30-year yields climbed to 3.493%, the highest since 2014. Jerome Powell recently said that the Fed would need to keep interest rates high enough to slow the economy “for some time” in order to curb high inflation. While a tight monetary policy "for some time" will bring down inflation from its 40-year high, it would mean slower growth, a weaker job market and "some pain" for households and businesses (read: Higher Yields to Fuel Rally in These ETFs).

Additionally, the latest bouts of data bolstered the case for rate hikes. The economy added 315,000 jobs in August, while the unemployment rate ticked up to 3.7% from 3.5%. Meanwhile, service activity picked up in August for the second straight month, indicating that the economy is not in recession and could able to manage rate hikes.

ProShares Short Real Estate ETF (REK)

ProShares Short Real Estate ETF seeks to deliver the inverse return of the daily performance of the Dow Jones U.S. Real Estate Index. The ETF makes profits when real estate stocks decline and is suitable for hedging purposes against the fall of these stocks. ProShares Short Real Estate ETF has amassed $42.1 million in its asset base while volume is moderate at around 85,000 shares a day.

ProShares UltraShort Real Estate ETF (SRS)

ProShares UltraShort Real Estate ETF offers two times inverse exposure to the performance of the Dow Jones U.S. Real Estate Index. It has managed assets worth $56.7 million and charges 95 bps in fees per year. ProShares UltraShort Real Estate ETF trades in an average daily volume of 174,000 shares (read: Rising Rate & Inflation-Beating ETFs at One-Month Highs).

Direxion Daily MSCI Real Estate Bear 3X Shares (DRV)

Direxion Daily MSCI Real Estate Bear 3X Shares seeks to deliver three times the inverse performance of MSCI US REIT Index. It has AUM of $116.3 million and an average daily volume of around 355,000 shares. Direxion Daily MSCI Real Estate Bear 3X Shares charges 95 bps in fees per year.

ProShares UltraShort Utilities ETF (SDP)

ProShares UltraShort Utilities ETF seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the Dow Jones U.S. Utilities Index. It has $3.8 million in AUM and an average trading volume of nearly 28,000 shares per day. ProShares UltraShort Utilities ETF charges 95 bps in fees per year from investors.

Bottom Line

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

Still, for ETF investors who are bearish 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 short 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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ProShares Short Real Estate (REK): ETF Research Reports

ProShares UltraShort Utilities (SDP): ETF Research Reports

ProShares UltraShort Real Estate (SRS): ETF Research Reports

Direxion Daily Real Estate Bear 3X Shares (DRV): ETF Research Reports

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Zacks Investment Research