A Bearish ETF for Falling Interest Rates

September 20th at 9:00am by Tom Lydon

Yields on 10-year Treasuries recovered modestly Thursday from Wednesday’s plunge of more than 5%, but with Federal Reserve tapering no longer in the cards, at least not over the near-term, expectations are in place that U.S. government bond yields will start to fall.

While that should bring relief to asset classes and sectors previously beaten up by soaring Treasury yields, think REITs and utilities as just two examples, other sectors have already shown vulnerability to falling rates. A prime example of a sector that could see price erosion if rates significantly decline is regional banks. [Regional Bank ETFs in Focus on Higher Rates]

Prior to Wednesday, 10-year Treasury yields surged almost 31% in the previous three months. Over the same time, the SPDR S&P Regional Bank ETF (NYSEArca: KRE) soared 10%. Highlighting the correlation between regional banks and higher rates, 10-year yields plunged almost 5.1% on Wednesday, a move that sent KRE down 0.8% on volume that was more than double the daily average. [The Sector ETFs the Fed Forgot to Boost]

KRE fell another 1.8% on Wednesday, but investors can profit from declines in regional bank stocks with a little-known non-leveraged, inverse ETF, the ProShares Short KBW Regional Banking (NYSEArca: KRS).

KRS “seeks daily investment results, before fees and expenses, that correspond to the inverse (-1x) of the daily performance of the KBW Regional Banking Index,” according to ProShares, the largest issuer of inverse and leveraged ETFs.

The KBW Regional Banking Index is not the underlying index for KRE, the largest regional bank ETF, so investors should expect the daily moves for KRE and KRS to have a perfectly negative correlation. Rather, the KBW Regional Banking Index is the underlying index for the PowerShares KBW Regional Banking Portfolio (NYSE: KBWR). KBWR was able to eke out a small gain Wednesday, but the fund lost 2.17% Thursday.

Investors may want to give KRS a look if lower interest rates continue to adversely affect regional banks, though it should be noted KRS is not heavily traded with average daily volume for the trailing three months of about 2,950 shares.

ProShares Short KBW Regional Banking

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of KRE.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. 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.

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