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U.S. Yields Rise to Multi-Year High: ETFs to Gain & Lose

Sweta Killa
The year 2019 could see slowdown in global M&A activity.

Treasury yields are once again surging buoyed by rounds of upbeat economic data and hawkish comments from Federal Reserve policymakers. Notably, the 10-year Treasury yields hit its highest level since July 2011 at 3.162% while the 30-year yield touched 3.318% - its highest level since October 2014.

Private-sector employment jumped with 230,000 job additions in September – the largest gain since February, per a report from Automatic Data Processing. Another report from the Institute for Supply Management showed that the U.S. services sector expanded at its fastest pace on record in September. The ISM non-manufacturing index rose to 61.6 last month, the highest level since the index was created in 2008.

The Fed is on track for gradual rate hikes this year, citing that the economy is strong and can handle a tighter monetary policy. Federal Reserve Chairman Jerome Powell said the central bank is "a long way" from getting rates to neutral, a fresh sign that he believes more hikes are coming. He further added that the ultra-accommodative policy to bring the economy out of the Great Recession is no longer needed. The central bank, which began to tighten monetary policy in 2015, has raised rates thrice this year and is expected to do so again in December (read: Fed Hikes Rates as Expected: ETF Areas That Gained).

The combination of all these factors boosted investors’ confidence in the American economy, leading to a spike in yields.

Pros and Cons

A rising rate environment is highly beneficial for cyclical sectors like financial, technology, industrials, and consumer discretionary. Banks are at the most advantageous position as they 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. Also, insurance companies are able to earn higher returns on their investment portfolio of longer-duration bonds.

Higher rates attract more capital to the country from foreign investors, thereby boosting the U.S. dollar against the basket of other currencies. However, this will have a huge impact on commodity-linked investments, reflecting that a rising rate environment will hurt a number of segments. In particular, high dividend paying sectors such as utilities and real estate will be the worst hit, given their higher sensitivity to rising interest rates. Additionally, securities in capital-intensive sectors like telecom will also be impacted by higher rates (read: Short These Sectors With ETFs as Fed Hikes Again).

Further, higher rates will also result in tighter lending conditions and curtail consumer spending on a wide range of products like cars and houses. This will in turn lower profitability across various segments.

Given this, we have highlighted three ETFs that will benefit from higher yields and three others that will be badly impacted.

ETFs to Benefit

SPDR S&P Regional Banking ETF KRE


This is one of largest and the most popular ETFs in the banking space with AUM of $5 billion and average daily volume of 5.7 million shares. The product follows the S&P Regional Banks Select Industry Index, charging investors 35 basis points a year in fees. Holding 127 securities in its basket, the fund is widely spread out across each security with an equal-weigh approach of around 2%. The fund carries a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook (read: Here's Why Should You Buy Financial ETFs).

Consumer Discretionary Select Sector SPDR Fund XLY

This product offers exposure to the broad consumer discretionary space by tracking the Consumer Discretionary Select Sector Index. It is the largest and the most popular product in this space with AUM of $15.7 billion and average daily volume of around 5.1 million shares. Holding 65 securities in its basket, the fund is heavily concentrated on the top firm Amazon AMZN at 23.1% while the other firms hold less than 11% of the assets. The fund charges 0.13% in expense ratio and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Consumer Confidence Soars to 18-Year High: 5 ETFs to Buy).

Invesco DB US Dollar Index Bullish Fund UUP

UUP offers exposure to dollar against a basket of six world currencies. This is done by tracking the Deutsche Bank Long US Dollar Index Futures Index Excess Return plus the interest income from the fund’s holdings of U.S. Treasury securities. In terms of holdings, UUP allocates nearly 57.6% in euro and 25.5% collectively in the Japanese yen and British pound. The fund has so far managed an asset base of $537.7 million while seeing an average daily volume of around 1.1 million shares. It charges 79 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

ETFs to Lose

iShares Mortgage Real Estate ETF REM


This fund offers exposure to the U.S. residential and commercial mortgage real estate sectors by tracking the FTSE NAREIT All Mortgage Capped Index. It holds 35 securities in its basket with large allocations to the top two firms, Annaly Capital NLY and AGNC Investment AGNC, that collectively make up for 29.6% share while other securities hold less than 8.1% share. REM is the most popular mortgage REIT ETF with AUM of $1.2 billion and average daily volume of around 187,000 shares. The fund charges 48 bps a year as fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

SPDR S&P Homebuilders ETF XHB

The most popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. In total, the fund holds about 35 securities in its basket with each accounting for no more than 4.7% share. Building products and homebuilding collectively account for 67.3% of the portfolio. The ETF has amassed $723.2 million in its asset base and trades in heavy volume of around 2.6 million shares. It charges 35 bps in fees per year and has a Zacks ETF Rank #4 (Sell) with a High risk outlook (read: Time to Buy Beaten-Down Homebuilder ETFs?).

SPDR Gold Trust ETF GLD

Gold will lose its sheen as higher interest rates diminish the metal’s attractiveness. Products tracking this bullion like GLD will lose. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $28.6 billion and average daily volume of around 6.2 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank #3 with a Medium risk outlook (read: Q3 ETF Asset Flow Roundup: What's Hot & What's Not).

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