No Surprise: Shy Away From Staples ETFs if Rates Rise

Ten-year Treasury yields are up almost 16.6% over the past month and that jump is sending chills throughout rate-sensitive, income-generating asset classes and sectors.

Income investor favorites such as real estate investment trust (REIT) and utilities exchange traded funds have been sent tumbling by rising Treasury yields while being stung by outflows along the way. Consumer staples ETFs have not been an exception, reminding investors that equities that are viewed as bond proxies are vulnerable to rising rates, just as bonds are. [Bond Proxy ETFs Decked]

The Consumer Staples Select Sector SPDR (NYSEArca: XLP), the largest consumer staples ETF, is off 1% over the past month. That is a tolerable loss, but it also could be a harbinger of what to expect from the stodgy staples sector if interest rates rise.

“Consumer Staples Stocks Have Underperformed in Prior Periods of Rising Treasury Yields. The past four periods of increases in 10-year Treasury yields of over 150 bps, consumer staples stocks underperformed, increasing on average 16.7% vs. an average gain of 33.1% in the S&P 500. This includes the most recent period of July 2012 through Dec. 2013 with consumer staples names increasing 22.1%, underperforming a 34.0% increase in the S&P 500,” according to an Oppenheimer note posted by Ben Levisohn of Barron’s.

Underscoring the vulnerability of staples stocks to rising Treasury yields is the fact that over the past month just three of XLP’s top 10 holdings, a group that combines for over 61% of the ETF’s weight, have traded higher. Weakness for XLP means the ETF is betraying what should be favorable seasonality as the fund is usually the second-best of the nine SPDRs in May. [Sector ETF Ideas for May]