Not much is working in equity markets this year, and with the Federal Reserve having boosted interest rates by a combined 75 basis points across two rate hikes, the bond market is riddled with pain, too.
Still, there are some glimmers of hope for investors. At the very least, there are some exchange traded funds that are doing their jobs. Take the case of the ProShares Equities for Rising Rates ETF (EQRR). EQRR, which tracks the Nasdaq U.S. Large Cap Equities for Rising Rates Index, entered Monday with a quarter of a percent year-to-date.
In more sanguine times, a gain of 0.25% through four and a half months of market action isn’t worth noting, but these aren’t sanguine times, and EQRR looks downright attractive relative to the S&P 500 and its 2022 loss of more than 15%. In fact, EQRR’s outperformance isn’t new.
“EQRR’s underlying index, Nasdaq U.S. Large Cap Equities for Rising Rates Index, has significantly outperformed the S&P 500 after the yield on the 10-yr Treasury started rising during the summer of 2020,” according to ProShares research.
Making EQRR’s 2022 showing all the more impressive is that, not surprisingly, the ETF is heavily allocated to financial services stocks. That sector represented 26.23% of the fund’s weight as of May 13. However, financial services equities are faltering this year despite the aforementioned rate hikes. While it’s the sector with highest three-year correlation to rising Treasury yields, financial services isn’t the only one with that distinction.
“The index first targets the five sectors that have had a tendency to outperform when rates rise – those sectors that have demonstrated the highest correlation with the 10-year U.S. Treasury yield over the prior 36 months,” added ProShares.
Other sectors with strong correlations to rising 10-year yields include energy, industrials, and materials — groups that combine for over 65% of EQRR’s weight. Energy, which is more than a third of the fund’s weight, is the best-performing group in the S&P 500 again this year.
Bottom line: EQRR is doing its job this year and is doing so in straightforward fashion, meaning that investors embracing the ETF aren’t subjected to disjointed strategies that are so often used to fight Fed tightening.
“Equity strategists and portfolio managers have traditionally addressed rising rates environments with a variety of fragmented approaches. EQRR synthesizes these strategies with a rules-driven, sector and stock selection approach that delivers,” concluded ProShares.
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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.