3 Sector ETFs Benefiting from Plunging Interest Rates


Markets haven’t been doing very well to start the year, and interest rates have been following stocks lower. In fact, benchmark 10-year government debt has fallen to a yield of 2.7%, a decline of roughly 30 basis points since the start of 2014.

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This dip in rates is a bit of a surprise due to the ongoing bond taper from the Federal Reserve, but given the surging risks in emerging markets, it does make some sense. After all, investors in these markets are fleeing their risky securities for the safe haven of U.S. T-bills, sending these rates lower and more than making up for the lesser level of Fed purchases.

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U.S. stocks have also been under pressure, as concerning data points—along with the emerging markets issue— are sending many stocks lower. However, thanks to the declining rates, we have seen a few winners (read 7 ETFs to Buy in 2014).

These winners largely come to us in the rate sensitive corners of the market where companies benefit from declining rates. Many of these firms were hurting in 2013 as rates nearly doubled, but with declining worries over a rate spike in the near term, these segments are starting to look a bit more promising once more.

Right now, these include some of the following segments and they can easily be played with any of the following ETFs:

Utilities: This safe sector has actually been outperforming the market so far in 2014 as broad stock indexes have plunged. One popular way to play this space in ETF form is via the Utilities Select Sector SPDR Fund (XLU), a product that has added nearly 2% YTD, compared to a 3.5% loss for SPY in the same time frame.

Real Estate: Concerns were really starting to build over the real estate market, but with a strong home price appreciation reading and low rates, these worries have been put on the backburner. One easy way to target this space is with the iShares Cohen & Steers REIT ETF (ICF), a product that pays a 3.5% 30 Day SEC yield, and has seen a gain of 5.7% YTD (see all the Real Estate ETFs here).

Homebuilders:  With worries over real estate sliding, and rates dipping lower, many are feeling more optimistic over homebuilders, and especially so given some solid earnings as of late. Investors can target this space with the iShares US Home Construction ETF (ITB) a product that gives direct exposure to the homebuilder space and may be poised for more gains ahead.

More Information

For more on these ETFs and the rate-sensitive segments, make sure to check out our short video on the subject below:

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ISHARS-C&S REIT (ICF): ETF Research Reports

ISHARS-US HO CO (ITB): ETF Research Reports

SPDR-UTIL SELS (XLU): ETF Research Reports

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