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Yields at Record Lows: 4 Sector ETFs to Buy

·4 min read

The coronavirus outbreak has spread worldwide, with confirmed cases in more than 40 countries. The situation has raised fears of pandemic, wiping out around $1.7 trillion from the U.S. stock market in just two days (Feb 24 and Feb 25) – representing the biggest two-day plunge since 2015. This led to risk-off sentiments, pushing the yields down.

Notably, the yields on the 10-year U.S. Treasury note fell to an all-time low of 1.302% and the yields on the 30-year note dropped to 1.807%, near its record low. Meanwhile, two-year yields tumbled to 1.136% – its lowest level since February 2017 (read: Treasury ETFs Hit New Highs as Coronavirus Fears Spread).

Sectors to Ride On

With bond yields at record-low levels, sectors such as utilities, real estate and homebuilders look beneficial. This is especially true as investors are piling up utilities and real estate in the hope of juicy yields. Utilities offer solid dividend payouts and excellent capital appreciation over the longer term while real estate are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends.

Homebuilders will get a boost as low yields will translate into lower rates, which in turn will encourage people to buy more homes and make refinance cheaper. Further, lower interest rates will keep borrowing cost down, thereby resulting in higher consumer spending and rise in economic activities. This will, in turn, increase profitability across various segments.

Meanwhile, gold mining stocks will also get a boost, given that these are leveraged plays on the underlying metal. The dual tailwinds of lower yields and flight to safety amid virus scare will raise gold’s appeal, pushing prices higher.

Given this, we have highlighted popular ETFs from these sectors that are set to benefit from lower yields.

Real Estate: Vanguard Real Estate ETF VNQ

This fund targets the real estate segment of the broader U.S. market. It follows the MSCI US Investable Market Real Estate 25/50 Index and holds 185 stocks in its basket with none accounting for more than 7.1% share. Specialized REITs take the largest share at 33.5% while residential REITs and retail REITs round off the top three with double-digit exposure each. Expense ratio comes in at 0.12%. VNQ is the most popular and liquid ETFs with AUM of $38.8 billion and average daily volume of around 4.6 million shares a day. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: What's Behind the Recent Rally in Real Estate ETFs?).

Utilities: Utilities Select Sector SPDR XLU

With AUM of $11.6 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm with 14.2% share while other firms hold no more than 7.8% of the assets. Electric utilities takes the top spot in terms of sectors at 62.4%, closely followed by multi utilities (31.1%). The product charges 13 basis points (bps) in annual fees and sees heavy volume of around 15.8 million shares on average. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: ETF Strategies to Mark as Covid-19 Flares up Recession Scares).

Homebuilders: iShares U.S. Home Construction ETF ITB

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $1.5 billion, it holds a basket of 44 stocks with double-digit concentration on the top two firms. The product charges 42 bps in annual fees and trades in heavy volume of around 2.4 million shares a day on average. It has a Zacks ETF Rank #2 with a Medium risk outlook (read: Will the Rally in Homebuilders ETFs Continue in 2020?).

Gold Mining: VanEck Vectors Gold Miners ETF GDX

This is the most popular and actively traded gold miner ETF with AUM of $13.5 billion and average daily volume of around 55.6 million shares. The fund follows the NYSE Arca Gold Miners Index, holding 47 stocks in its basket. Canadian firms account for half of the portfolio, while the United States (18.2%) and Australia (14.3%) round off the top three. The fund charges 52 bps in annual fees (read: How to Play Gold Rally With ETFs).

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Vanguard Real Estate ETF (VNQ): ETF Research Reports
 
Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
 
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
 
VanEck Vectors Gold Miners ETF (GDX): ETF Research Reports
 
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