On Monday, 8/19/2013, U.S. stocks logged their first 4-day losing streak of the calendar year. Until recently, the idea of a pullback had begun to seem far-fetched. The S&P 500 SPDR Trust (SPY) had been hitting high after record high with remarkable ease. Now the only “rally talk” is centering on how high longer-term bond yields might climb.
The higher the 10-year Treasury yield goes, the lower most market-based securities go. The ugliest falls from grace have occurred in former safe haven segments like REITs, preferred shares and utilities.
|Rising Longer-Term Yields Are Killing Most ETFs||¬†||¬†||¬†|
|¬†||¬†||¬†||¬†||¬†||Approx 1 Mo||¬†||Approx 6 Mo|
|iShares DJ Real Estate (IYR)||¬†||¬†||-11.9%||¬†||-9.6%|
|iShares Home Construction (ITB)||¬†||-11.0%||¬†||-11.3%|
|iShares FTSE Mortgage REITs (REM)||¬†||-10.3%||¬†||-20.8%|
|iShares DJ Utilities (IDU)||¬†||¬†||-5.7%||¬†||3.0%|
|iShares U.S. Preferred (PFF)||¬†||¬†||-5.2%||¬†||-5.5%|
|SPDR S&P 500 Trust (SPY)||¬†||¬†||-2.6%||¬†||8.6%|
|iShares DJ Technology (IYW)||¬†||¬†||2.3%||¬†||7.0%|
|First Trust Internet (FDN)||¬†||¬†||0.4%||¬†||12.1%|
|iShares DJ Aerospace (ITA)||¬†||¬†||0.3%||¬†||24.4%|
|iShares DJ Pharmaceuticals (IHE)||¬†||-0.9%||¬†||12.2%|
|iShares DJ Health Provider (IHF)||¬†||-2.0%||¬†||15.9%|
I continue to emphasize that the assets most likely to succeed are those that are less tied to rate sensitivity as well as those that have defensive attributes. For clients, I have maintained an allegiance to exchange-traded vehicles in pharmaceuticals, aerospace and consumer staples sectors. More recently, hedge fund desire for Apple (APPL) ownership has increased the attractiveness of technology ETFs; funds like iShares DJ Technology (IYW) and Vanguard Information Technology (VGT) have some of the highest Apple (APPL) weightings.
Very few investments can thrive in August’s environment of U.S. central bank policy uncertainty. You might even say that we are seeing signs of a mini-panic — a quasi-stampede for the exits of virtually anything with a yield component. Yet the reversal of fortune on Apple (APPL) is certain to buoy technology ETFs.
Similarly, First Trust Internet (FDN) may be one of the few funds that is demonstrating three solid months of increasing relative strength against the broader market. Not only is the current price above a 50-day and 200-day trendline, but FDN’s relative strength versus SPY is near a high for 2013.
In reality, even tech and health care ETFs will not be able to handle an unchecked rise in longer-term yields. The surprisingly swift run from 1.6% to 2.9% on the 10-year has already decimated investor perception of homebuilding and real estate-related assets; fears of a significant slowdown in consumer spending is another thorn in the bull’s side.
The best moves today? Sell those assets that have been the biggest drag on your portfolio to free up some cash. Use the cash to buy coveted ETFs as the market corrects. That means, continue to favor areas of the market that possess a combination of defensive qualities and limited rate sensitivity.