Rising 10-year Treasury yields have, predictably, stoked chatter about the vulnerability of interest rate-sensitive asset classes and sectors. Case and point: Utilities stocks and exchange traded funds.

Over the past three months, the Utilities Select Sector SPDR (NYSEArca: XLU), the largest utilities ETF, is off 2.2% as 10-year Treasury yields have surged nearly 13%. There was a time when such a yield spike would have been problematic for the PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV), particularly if investors did not properly understand how SPLV works, but that is not the case today. [Focused Use of Low Volatility ETFs]

The low-volatility ETF targets 100 of the least volatile stocks from the S&P 500 index and weights the positions inverse to volatility – the least volatile stocks has a greater weight in in the portfolio. That led to spurious accusations that SPLV was a utilities ETF in disguise. Critics will be heartened to learn that the utilities sector is now SPLV’s second-smallest sector weight.

The ETF’s utilities allocation has dwindled to 2.6% as of June 12 from 19.4% in September. In fact, SPLV is underweight utilities stocks by 20 basis points relative to the S&P 500. [Surprises in Low Vol ETFs]

“Given the prospect of higher rates, investors may wish to consider a low volatility investment approach and check their holdings for interest rate sensitivity. Over the past five years, financial stocks have been among the most sensitive to rising interest rates – especially insurance and diversified financial shares,” according to a recent PowerShares note.

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