3 Sector ETFs To Benefit If Rates Drop

The markets have been performing very well lately, occasionally hitting all-time highs. The buoyancy was triggered off by the hope of a delayed Fed rate hike amid a slew of sub-par U.S. economic data. In fact, the benchmark 10-year government debt fell to a yield of 2.19% on May 21, 2015 registering a decline of 9 basis points from this month’s high of 2.28% (on May 12, 2015).

Though the overall U.S. market has gathered steam, we might see some specific winners in the days to come on declining rates and the possibility of a late Fed rate hike. These winners mainly hail from the rate sensitive areas of the market and this set of companies look to benefit from lower interest rates. Notably, these spaces are strong dividend plays and quench investors’ thirst for current income in a low rate environment of developed economies.

Below, we have highlighted three sector ETFs that could be the biggest gainers from the falling rate scenario.

Utility

The sector is high on safety and dividend payout. The operating atmosphere is in favor of the utility sector as the economy is picking up momentum, albeit slowly. As the utility sector requires huge infrastructure leading to an immense debt burden and the consequent interest obligation, the companies tend to perform well when rates are low in the economy.

Utilities Select Sector SPDR ETF (NYSE:XLU) is by far the most popular choice in the utilities space. The fund was up 3.3% in the last one week (as of May 21, 2015). XLU has a dividend yield of 3.43% (as of the same date).

Mortgage REITs

Per Bloomberg, U.S. mortgage rates dropped “for the first time in a month”. This will help home buyers in the busy spring selling season. The Bloomberg article quoted the Mortgage Bankers Association which thinks the average 30-year fixed mortgage rate will likely touch 4.3% by Q4 of 2015 and may not cross the 5% mark before mid 2016.

As a result, mortgage REITs could be due for some more gains. iShares Mortgage Real Estate Capped (NYSE:REM) was up 0.9% in the last one week (as of May 21, 2015). REM has a dividend yield of 12.84% (as of May 21, 2015).

Housing

With rates dipping, many are feeling more confident about homebuilders. Also, as the recent housing data showed that new home construction soared to a seven-and-half year high in April, worries over reduced inventory looks to be sinking.

Investors can target this space with UBS ETRACS ISE Exclusively Hmbldrs ETN, a product that gives direct exposure to the homebuilder space and may add some returns ahead. HOMX was up 1.1% in the last one week (as of May 21, 2015).

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