Short These Sector ETFs On Rising Rate Concerns

The faster-than-expected increase in rates has been playing foul on rate-sensitive sectors since the start of February. This is especially true as an upbeat January jobs report, which showed the fastest pace of wage growth in more than eight years, has taken a toll on these sectors stroking inflation fears and speculation of speedy rate hikes. This has also pushed up bond yields sharply.

Notably, yields on the 10-year Treasury bonds are hovering around 2.89% at the time of writing, up from 2.78% at the start of February.

Additionally, surging global economic growth is indicating an inflation comeback and the prospect of faster-than-expected monetary policy tightening. The cheap monetary policy era ended in Asia with South Korea becoming the first major central bank to increase interest rates for the first time in more than six years. The Bank of England, too, has raised interest rates for the first time in more than 10 years.

The European Central Bank (ECB) will start cutting its massive €60-billion-per-month asset buying program to halve from January 2018 until at least September 2018 while the Bank of Japan will continue its massive stimulus program until the economy reaches a sustained 2% inflation.

In such a situation, high-dividend-paying sectors such as utilities and real estate would be the worst hit given their higher sensitivity to rising interest rates. In fact, rising bond yields have started taking away some sheen from these stocks, putting them under severe pressure for the months to come as well.

In spite of avoiding these stocks altogether, investors could make a short-term bearish play on the rate-sensitive sectors as these spaces will continue to trade sluggishly if interest rates keep on rising.

How to Play?

While futures or short-stock approaches are some of the possibilities, inverse ETFs 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.