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Portfolio > Alternative Investments > Real Estate

Rate Sensitive Markets Thrive

By Ronald Delegge

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It’s fair to say that proclamations of fire and brimstone for markets that are sensitive to interest rate changes were premature.

U.S. Treasury ETFs with maturities of 20 years or longer like the iShares 20+ Yr. Treasury Bond ETF (TLT) have jumped 9.31% and have easily outperformed the broader U.S. stock market. Interest rates have stayed contained, thereby lifting bond prices.

Leveraged Treasury ETFs like the Direxion Daily 20+ Yr. Treasury Bull 3x ETF (TMF) have soared over 25% year-to-date (YTD). TMF aims for triple or 300% daily leverage to long-term U.S. Treasuries.

Although long-term Treasuries have more duration risk versus shorter-term bonds, it has yet to hurt performance. Nevertheless, it’s a lingering risk.

For example, if interest rates were to rise by 2% from today’s depressed levels, an investment grade bond with a duration of 14.5 years (30-year maturity, 4.5% coupon) might experience a loss in value of 26%. By comparison, a medium investment grade corporate bond (BBB, Baa rated or similar) with a duration of 8.4 years (10-year maturity, 3.5% coupon) could lose 15% of its market value, according to Fitch Ratings.

Like long-term Treasuries, other rate sensitive areas like real estate have performed strongly in 2016 too.

The Vanguard REIT ETF (VNQ), which holds broad exposure to the publicly traded U.S. real estate market, has gained 9.78% YTD. Similarly, global real estate has been a stellar performer. The iShares Global REIT ETF (REET) is ahead by 9.15% YTD.

Within the S&P 500, the utilities sector (XLU) has gained almost 15% YTD. Additionally, steady dividends, a characteristic of utilities, have helped lift the attractiveness of the sector. XLU’s 12-month dividend yield hovers around 3.32%, adding further potential to total returns.

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