With many prepping their portfolios in light of the Federal Reserve’s changing monetary policies ahead, ProShares rolled out a new equity exchange traded fund strategy specifically crafted for a rising interest rate environment.
The newly launched ProShares Equities for Rising Rates ETF (NasdaqGM: EQRR) is the first U.S. stock ETF designed to outperform traditional large-cap indices, like the S&P 500, during a rising rate environment.
“EQRR is for investors who expect rising interest rates and want to outperform traditional large-cap indexes as rates go up,” Michael L. Sapir, co-founder and CEO of ProShare Advisors, LLC, the advisor to ProShares, said in a note. “EQRR takes those sectors most positively correlated with interest rates, then within those sectors invests in the companies that have tended to outperform during periods of rising rates.”
The new ETF tries to reflect the performance of the Nasdaq U.S. Large-Cap Equities for Rising Rates Index, which selects 50 components from a universe of the 500 largest companies based on market capitalization listed on the U.S. exchange that have historically outperformed during periods of rising interest rates.
On a quarter-by-quarter basis, the underlying index will target the five most interest rate sensitive industry sectors out of the original universe based on the correlation of weekly sector performance to weekly percentage changes in 10-year u.S. Treasury yields over the prior three-year period. The sector with the highest correlation will have a 30% position in the index, followed by 25% for the second highest, 20% for the third highest, 15% for the fourth highest and 10% for the fifth highest.
EQRR started off with has a 30% tilt toward financials, followed by 25% oil and gas, 20% industrials, 15% basic materials and 10% technology.
Each sector will hold 10 stocks for inclusion, with each stock exhibiting the strongest correlation of over performance compared to the increase in 10-year U.S. Treasury yields based on a weekly observation over the past three years. If there aren’t enough large-cap stocks that meet the requirement, then the index may include top ranked mid-cap stocks.
Top holdings include E*Trade Financial Corp, Lincoln National Corp., Prudential Financial Inc, Fifth Third Bancorp and Zions Bancorp.
“Certain equity market sectors are more sensitive to interest rates than others and can rise or fall as rates change. There are also stocks within these rate-sensitive sectors that have a greater tendency to demonstrate positive or negative results as rates move than others. These different sensitivities to rates create an opportunity,” according to ProShares.
EQRR also comes with a 0.35% expense ratio, and its underlying index shows a dividend yield of 2.62%.
The Equities for Rising Rates ETF may complement ProShares’ line of fixed-income strategies for a rising rate environment, including the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG). The two rate-hedged bond ETF strategies could outperform non-rate-hedged bond ETFs if interest rates rise.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.