Leveraged ETFs For Coping With Rising Interest Rates
Yields on 10-year U.S. Treasuries are up 1.6 percent at this writing Monday, taking the one-month yield surge on those bonds north of 15 percent.
With those yields flirting with 2.88 percent, the conversation about three percent yields becomes more important and possibly more a matter of "when" not "if."
Rising Treasury yields are not just bad news for bond investors. Scores of equity-based ETFs have been decked in the past month by the yield spike. That also means there are inverse and leveraged ETFs that are benefiting from rising rates. Of the 21 best-performing ETFs over the past month, roughly a third are inverse or leveraged plays on U.S. government bonds or sectors sensitive to rising interest rates.
Assuming rising 10-year yields are not a temporary phenomenon, active traders should consider getting acquainted with the following leveraged funds.
Direxion Daily Real Estate Bear 3X ETF (NYSE: DRV)
Not including Monday's performance, DRV has surged 22 percent in the past week. The primary catalyst is rising interest rates. Yields on U.S. government 10-years are up 30 basis points in the past month. Over that same time, eight of the 20-worst non-leveraged ETFs are REIT funds.
DRV's roughly $19 price tag looks affordable today, but the fund will undergo a 1-for-4 reverse split that goes into effect on Tuesday. The fund attempts to deliver three times the daily inverse performance of the MSCI US Investable Market 2500 Index. That index is primarily allocated to specialized and retail REITs as those two REIT sub-sectors combine for over 56 percent of the index's weight.
ProShares UltraPro Short 20+ Year Treasury (NYSE: TTT)
The 10-year Treasury yield garners most of the headlines, but it should not be forgotten that longer-dated bonds are more sensitive to changes in interest rates. That explains TTTT's recent success. Heading into the start of trading Monday, TTT had gained 15.7 percent in the past month.
On Monday, the fund hit a new 52-week high. Since the start of August, yields on 20-year U.S. government bonds are up 13 basis points while the yields on 30-years have gained nine basis points. TTT attempts to deliver three times the daily inverse performance of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
ProShares UltraShort Utilities (NYSE: SDP)
Folks can say the impact of rising rates is priced into utilities stocks all they want. The reality is the SPDR Utilities ETF (NYSE: XLU) is now down more than five percent in the past month, a performance that serves as a reminder to conservative investors that everything is find and dandy with utilities stocks...until interest rates rise.
Among leveraged ETFs, SDP does not get a lot of press, though some have been prescient enough to call attention to the fund. In the past month, SDP is up nearly 11 percent.
Investors should note SDP is not the double-leveraged inverse equivalent of XLU, but rather the iShares U.S. Utilities ETF (NYSE: IDU).
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Disclosure: Author owns none of the securities mentioned here.
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