Ten-year Treasury yields are coming off a low base, but that does not mean the 21% move higher by those yields since Jan. 30 is not notable.
It is particularly notable for investors holding an array of rate-sensitive asset classes and the corresponding exchange traded funds. In just two weeks, some of 2014’s most beloved and best-performing ETFs have gone from star status to looking vulnerable.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT), iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and the Utilities Select Sector SPDR (NYSEArca: XLU), the top performer among the nine sector SPDR ETFs last year, are among the popular ETFs stung by the recent rise in 10-year yields. [Rate Sensitive ETFs Get Jammed Up]
Since Jan. 30, TLT has tumbled 6% while XLU and IYR are down an average of 2.8%. While declines for those ETFs as Treasury yields rise are predictable, there are other opportunities at the sector that have histories of performing nicely when U.S. government prices fall.
Cyclical ETFs with intimate ties to a burgeoning U.S. economy have a tendency to perform well as rates rise, reports John Melloy for CNBC. That group includes the iShares U.S. Energy ETF (NYSEArca: IYE), iShares Transportation Average ETF (NYSEArca: IYT) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX).
IYE, IYT and SOXX “all gained, on average, more than 8 percent during a 30-day period of rising rates. The search looked at 19 such periods of rising rates over the last 10 years,” according to CNBC.
The thesis behind IYE’s utility as a rising rates sector ETF idea is bolstered when examining the performance of the Energy Select Sector SPDR (NYSEArca: XLE) during the Federal Reserve’s last tightening cycle. From 2004 through 2006, XLE, the largest energy ETF, surged nearly 122%. [Sector ETFs for Rising Rates]
The Industrial Select Sector SPDR (NYSEArca: XLI) and the Materials Select Sector SPDR (NYSEArca: XLB) also outperformed during that last time rates rose, indicating cyclical sector prove durable even as borrowing costs climb.
Since Jan. 30, IYT and SOXX are up 2.6% and 4%, respectively. Not surprisingly, the SPDR S&P Regional Banking ETF (NYSEArca: KRE) has some wind at its back with the recent jump in Treasury yields. KRE, the largest regional bank ETF, is up 7.1% since Jan. 30.
When Treasury yields jumped in 2013, KRE surged 47.5%. Amid the 2014 yield retreat, the ETF rose just 1.8% while the S&P 500 climbed 13.5%. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury. [A Breakout for Regional Bank ETFs]
iShares Transportation Average ETF
Tom Lydon’s clients own shares of IYT and TLT.