Investors are beginning to take a Federal Reserve interest rate hike seriously as improving economic data allows the central bank more leeway in tightening monetary policies.
Consequently, we witnessed greater redemptions out of real estate investment trusts, fixed-income assets and other dividend-yielding stock exchange traded funds over October ahead of a potential rate hike.
For instance, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) was the most unpopular ETF of October, experiencing close to $1.7 billion in net outflows for the month, according to ETF.com.
Additionally, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which recent saw a record daily outflow, lost $641.9 million in assets, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) saw $619.3 million in redemptions and iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) shrunk by $491.9 million.
Speculative-grade bonds also weakened over the past week, alongside falling oil prices, on renewed concerns that the decline in crude oil could negatively affect the highly leverage energy sector, raising credit risks.
The Vanguard REIT ETF (NYSEArca: VNQ) shrunk by $692.7 million and iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) bled $765.4 million on rising rate risks as well. REITs, which traditionally have been popular for their attractive dividend yields, are under pressure. When interest rates rise, REITs’ interest payments go up, so the companies have less cash flow available for dividends. The high dividends in REITs are attractive in a low-rate environment but are less enticing once safer Treasuries show higher rates.
The iShares Edge MSCI Min Vol USA ETF (NYSEArca: USMV) also saw $889.7 million in outflows, which suggests that investors may have shifted out of more defensive positioning as corporate earnings continued to improve.
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