Now that trade war concerns appear to have eased somewhat, decent Q1 earnings have started hitting the market and some upbeat economic readings are coming up, long-term U.S. treasury yields have started soaring. Yields on 10-year Treasury notes crossed the 2.9% mark on Apr 19, marking the one-month high.
Initial claims for state unemployment benefits declined 1,000 to a seasonally adjusted 232,000 for the week ended Apr 14.Retail sales rose 0.6% sequentially in March 2018, rebounding from a 0.1% decline in February and beating market expectations of a 0.4% gain.
Moreover, expectations are rife that the Fed will enact three or possibly four interest rate rises this year after New York Fed President William Dudley made such comments lately. He also indicated that the Fed may target raising the policy rate to about 3%. Also, inflation expectations jumped to the highest level in about three years thanks to the multi-year high commodity prices.
Given this, investors must be interested in finding out the ways to weather a sudden jump in the benchmark bond yields and increased inflationary expectations. For them, below we highlighted a few ETFs.
ETFs to Play Rising Yields: ProShares Inflation Expectations ETF (RINF)
Higher inflationary expectations make it necessary to focus on an inflation-oriented fund like the ProShares Inflation Expectations ETF (NYSEARCA:RINF).
The underlying index — the Citi 30-Year TIPS (Treasury Rate-Hedged) Index — tracks the performance of long positions in the most-recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS.
It yields 2.80% annually and charges 30 bps in fees.
ETFs to Play Rising Yields: Sit Rising Rate ETF (RISE)
The Sit Rising Rate ETF (NYSEARCA:RISE) is a strategic interest rate-hedging tool that gives investors the opportunity to benefit from the rise in the interest rates.
The portfolio targets a negative 10-year duration using futures and options on two, five and 10-year maturity Treasury futures contracts.
RISE charges 43 bps in annual fees and expenses.
ETFs to Play Rising Yields: First Trust International Multi-Asset Diversified Income Index Fund (YDIV)
Underlying the First Trust International Multi-Asset Diversified Income Index Fund (NASDAQ:YDIV) is the NASDAQ International Multi-Asset Diversified Income Index, which uses a modified market-capitalization weighting methodology and is designed to provide exposure to multiple asset segments outside the United States.
The 126-holding fund puts 20.53% weight in Fixed Income ETFs, 20.43% weight in dividend paying equities, 19.75% focus on preferred securities, 19.4% in REITs and 18.9% in infrastructure companies.
YDIV yields about 5.35% annually.
ETFs to Play Rising Yields: Liberty US Low Volatility ETF (FLLV)
The Liberty US Low Volatility ETF (NYSEARCA:FLLV) is an 87-stock fund that looks to offer capital appreciation with a focus on lower volatility than the broader equity market, as measured by the Russell 1000 Index.
The fund charges 50 bps in fees. No stock accounts for more than 1.45% of the basket.
FLLV is heavy on Information Technology (23.63%) followed by Financials (14.80%) and Health Care (13.37%).
ETFs to Play Rising Yields: iShares Floating Rate Bond ETF (FLOT)
The iShares Floating Rate Bond ETF (BATS:FLOT) offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates.
Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared with traditional bonds. As such, unlike fixed coupon bonds, these will not lose value when the rates go up.
Hence, FLOT protects investors from capital erosion in a rising rate environment. The fund charges 20 bps in fees.
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