Rethinking Rate-Sensitive ETFs

Ten-year Treasury yields fell Thursday, but that does not alter the fact that those yields are up 6.3% this year. More staggering is the yield’s surge since the Feb. 2 bottom, one equivalent to about 60 basis points or over 37%.

Those rising yields have sent investors scampering out of exchange traded funds with exposure to rate-sensitive assets and sectors. To its credit, the Utilities Select Sector SPDR (NYSEArca: XLU) has mustered a decent 90-day gain of 3.6%, but the largest utilities ETF is still down 8.5% this year. That makes XLU the worst of the nine sector SPDRs after it was the best of the nine last year with a gain of 28.7%. [Sticking With Utilities ETFs]

Real estate investment trusts (REITs) and the related ETFs have also done precious little to enthuse investors. For example, the iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) is down 3.2% this year after climbing 26.7% this year.

Those declines have sent investors heading for the exits. Year-to-date, XLU has shed almost $619 million in assets. IYR is lighter by $1.56 billion while the Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF, has lost $500 million. Translation: Disdain for ETFs like IYR and XLU could be reaching extreme levels, signaling that a buying opportunity could be afoot. [Crunch Time for Rate-Sensitive ETFs]

“Since US yields peaked in September of 2013, the ratio of the SPDR S&P 500 ETF (NYSEArca: SPY) and US Real-Estate Trust ETF (IYR) is now two standard deviations above its regression line (i.e. yield-sensitive underperformance). This is now the third time this has happened during that time frame,” said Rareview Macro founder Neil Azous in a note out Thursday. “The last two times this happened, the S&P 500 (SPX) had plateaued and sold off in excess of 6% from peak to trough.