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Hawkish Yellen, Draghi Boost These ETF Areas

Fed chief Yellen and ECB head Mario Draghi sent hawkish signals for their respective monetary policies. Yellen indicated that the U.S. economy can endure higher interest rates and cautioned of rich asset valuations (read: Yellen Gives Hawkish Signals: 5 ETF Plays).

Yellen also made it clear that the Fed’s gradual policy tightening and reduction of its $4.5 trillion balance sheet will remain on course (read: Trump Slump to Oil Slide: Top ETF Stories of First-Half 2017).

Mario Draghi said that the ECB could modify its sub-zero interest rates and hinted at a huge bond purchase program as the economy is on the mend. Lower inflation issues are being viewed as short-lived by Draghi, as per an article published on MarketWatch. Investors took these as signals of a shift from the ECB’s ultra-easy monetary policy. However, any modification in the ECB’s policy are likely to be gradual.

Sensing chances of policy tightening in the Euro zone, the yield on the two-year German government bond increased 6.3 basis points to -0.584%, the highest level in a year. CurrencyShares Euro ETF FXE got a lift and added over 1.5% on June 27(read: Why & How to Trade the Soaring Euro with ETFs).

In the U.S., the yield on the 10-year Treasury note rose 6.3 basis points to 2.198% on June 27 from previous the day, the highest since the Fed meeting in mid-June. The bullishness gave a boost to the following ETF areas. Most of the following ETFs hit a 52-week high on June 27.

Financials

As financial stocks perform better in a rising rate environment, the sector benefited from the central banks’ hawkish tone (see all financial ETFs here). 

SPDR S&P International Financial Sector ETF IPF

The fund puts about half of its weight in Europe. Bank stocks account for about 60% of the fund, followed by insurance stocks. The fund charges 40 bps in fees. It added over 0.7% on June 27.  

PowerShares KBW High Dividend Yield Financial Portfolio KBWD

The underlying index of the fund is a dividend yield weighted index seeking to reflect the performance of about 40 publicly listed financial companies in the U.S. The fund charges 35 bps in fees and yields about 8% annually.

Interest-Hedged Long-Term Bonds

iShares Interest Rate Hedged 10+ Year Credit Bond ETF CLYH

Rising rates result in widening losses for bonds since bond price and yields are inversely related to each other. As a result, interest-hedged bonds are not vulnerable to rising rates (read: Prepare for Rising Rates with These Inverse & Hedged Bond ETFs)

The fund looks to track the interest rate risk of a portfolio composed of investment-grade U.S. corporate bonds and U.S. dollar denominated bonds, with remaining maturities greater than 10 years. The fund’s net expense ratio is 0.29% and it yields about 2.91% annually. On June 27, CLYH added about 0.4%.

Floating Rate Bonds

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds.

VanEck Vectors Investment Grade Floating Rate ETF FLTR

The fund consists of U.S. dollar denominated investment grade floating rate notes. FLTR has an effective duration of 0.13 years and thus presents minimal interest rate risks.

iShares Treasury Floating Rate Bond TFLO

The underlying index is market cap weighted and measures the performance of floating rate public obligations of the U.S. Treasury.

Preferred Securities

VanEck Vectors Preferred Securities Ex Financials ETF PFXF

Preferred stocks are hybrid securities having characteristics of both debt and equity. The preferred stocks pay stockholders a fixed, agreed-upon dividend at regular intervals, like bonds. Yields are considerably higher for these.

The index of the fund looks to track the overall performance of U.S.-listed preferred securities. It charges 41 bps in fees and yields 5.94% annually.

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CRYSHS-EURO TR (FXE): ETF Research Reports
 
VANECK-IG FRB (FLTR): ETF Research Reports
 
PWRSH-K HDY FP (KBWD): ETF Research Reports
 
ISHARS-IR H10YC (CLYH): ETF Research Reports
 
ISHA-TR FLTG RT (TFLO): ETF Research Reports
 
SPDR-SP I FINL (IPF): ETF Research Reports
 
VANECK-PS EX-F (PFXF): ETF Research Reports
 
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