May ETF Performance Review: Rate Surge Wipes Out Treasury Funds

May 31st at 6:00pm by Tom Lydon

The stock markets and exchange traded funds continued to reach new highs over May but began to falter toward the end of the month as investors took the opportunity to take profits. Meanwhile, safe-haven Treasury prices are getting pummeled with yields on benchmark 10-year notes back above 2%.

With interest rates rising, long-term Treasury bonds have been falling – bond prices have an inverse relationship with yields.  PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (NYSEArca: ZROZ) and Vanguard Extended Duration Treasury ETF (NYSEARca: EDV) are both down about 10% for the trailing month. They are amontg the worst-performing unleveraged ETFs for the period. [Treasury Bond ETFs Pressured by Fed, Improving Data]

The Dow Jones Industrial Average was 3.7% higher over May. Meanwhile, the Nasdaq Composite increased 4.9% and the S&P 500 rose 3.8%.

The top non-leveraged ETFs over May include the Guggenheim Solar ETF (NYSEArca: TAN) up 27.1%, First Trust NASDAQ Clean Edge Green Energy Index Fund (NYSEArca: QCLN) up 22.3% and Market Vectors Solar Energy (NYSEArca: KWT) up 21.5%.

Solar ETFs are burning up as industry growth outshines expectations that a string of negative factors would weigh on solar stocks. The sector is finally catching a break after the dismal performance last year. [Solar ETF Rallies Over 50% in a Month]

Shares of electric car maker Tesla (NasdaqGS: TSLA), a major component of QCLN, surged on impressive earnings and a positive report from Goldman Sachs. [Tesla’s Surge Buoys Inflows to Green Energy ETF]

The worst performing non-leveraged ETFs for the month include the iShares MSCI Australia Small-Cap Index Fund (NYSEArca: EWAS) down 12.8%, iShares FTSE EPRA/NAREIT Asia Index Fund (NYSEArca: IFAS) down 12.1% and IQ Australia Small Cap ETF (NYSEArca: KROO).

Australian markets are slowing as a result of a combination of factors, including speculation on Fed stimulus “tapering” and slowing growth out of China, a major importer of Australian natural resources.

Real estate investment trusts took a hit on the Fed speculation and concerns of rising interest rates, notably mortgage-backed REITs, or mREITs. The iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSEArca: REM) and the rival Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT) both declined over 10%. [Mortgage REIT ETFs Hit by Fed ‘Tapering’ Chatter]

Looking over May, the month started off with a slightly better-than-expected monthly jobs report that helped fuel the risk-on trade in equities. Moreover, stocks continued to gain as lower jobless claims pointed to solid growth for jobs and higher retail sales boosted confidence.

Stocks started to drift lower toward the end of May as the markets anticipated the Fed to begin tapering down stimulus. Nevertheless, positive economic data, including a sizable dip in jobless claims and improving home sales, helped offset some losses.

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Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.