Interest Rate Volatility Slams Real Estate ETFs And Telecom ETFs

by: Gary Gordon

Has global monetary stimulus by the world's central banks squashed eurozone collapse fears forever? On Wednesday, European leaders hinted that they may withhold bailout euro-dollars from Athens due to lack of progress on government reform initiatives. The occurrence barely registered as an afterthought on most people's radar screens.

Of course, there was a time when a hiccup in Greece roiled global equity markets. Not anymore. For that matter, higher energy costs once held sway over stock market enthusiasm. Yet ever-increasing gasoline prices have done little to derail the equity train.

In certain years, corporate profitability and top-line sales moved the needle. If that were the case right now, however, few would celebrate earnings growth of 1%-2%. Even fewer would cheer a revenue decline of 1% for S&P 500 corporations. In fact, sales for companies in the large-cap barometer have not contracted since the third quarter of 2009.

Even a stagnant U.S. economy cannot incite a stock buyer's strike. Gross Domestic Product (GDP) has likely averaged a paltry 1% over the last 3 quarters. Disability claims have outpaced new jobs in roughly 40 of the last 42 months. Meanwhile, labor force participation remains near 35-year lows. Without the success of rate-sensitive real estate and auto, there would be little cause for optimism.

And therein lies the dilemma. The Federal Reserve and its chairman, Ben Bernanke, have masterfully manipulated interest rates through a combination of overnight lending rate policy, quantitative easing and "Fed Speak." On the other hand, with the prospect of a directional shift, rising 10-year yields are simultaneously threatening the housing price rebound and the record highs for the big time benchmarks (e.g., S&P 500, Dow Industrials, etc.).

It follows that when a better-than-expected manufacturing data point pushed the 10-year yield from 2.49% up to 2.59% on Wednesday, U.S. stocks shuddered. Stock ETFs that represent sectors that are most sensitive to rising rates were hit the hardest, from residential real estate to utilities to timber to telecom.

Rising Interest Rates: The Only Thing That Might Derail U.S. Stock ETFs
Approx 1-Day
iShares FTSE NAREIT Residential REIT (NYSEARCA:REZ) -2.6%
iShares Cohen & Steers Realty Majors (NYSEARCA:ICF) -2.2%
Vanguard REIT (NYSEARCA:VNQ) -2.0%
Vanguard Utilities (NYSEARCA:VPU) -1.5%
First Trust Utilities (NYSEARCA:FXU) -1.3%
PowerShares Water Resources (NASDAQ:PHO) -1.0%
Guggenheim Global Timber (NYSEARCA:CUT) -0.8%
Vanguard Telecom (NYSEARCA:VOX) -0.8%
S&P 500 SPDR Trust (NYSEARCA:SPY) -0.4%

It is possible that interest rates will be more volatile in the coming months. That said, the Fed is not likely to taper their bond purchases in September. Such an event would likely cast a dark shadow across every asset class on the board, not just the ones that are sensitive to rising rates. Foreign stocks, domestic stocks, foreign bonds, domestic bonds, preferreds, convertibles, partnerships, trusts — everything would get trampled. Granted, the Fed's dual mandate does not mention market-based security prices or home prices. Nevertheless, members of the committee will be too reluctant to take the blame for changing direction prematurely.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.