3 ETFs That Rising Rates Could Affect

February 23, 2015

US Real Estate

In 2014, real estate in the U.S. rode a strong tailwind of falling interest rates and other favorable real estate market factors. While our research indicates that REITs do not exhibit a perfect negative correlation with interest rates, there have definitely been tendencies for changes in interest rates to affect REIT prices.


RWR closed on Jan. 29 of this year at $99.01, then dropped 4 percent to close at $95.07 on Feb. 17.


Yield Stocks

Investors, like consumers, face choices. While one investment might look relatively attractive today, it may look relatively unattractive tomorrow. This tradeoff could affect yield stocks in the U.S. 


Driven somewhat by demand from yield-thirsty investors, valuations in yield stocks have recently been at elevated levels. The price-earnings multiples (P/E ratios) as of Feb. 13, for DVY was 19.03—not exactly a discount.  


If interest rates do rise, the underlying equity risk could outweigh the spread yield able to be earned in these bond market proxies over bonds. While yield stocks, such as the ones in DVY’s portfolios, stayed relatively flat from Jan. 30, to Feb. 17, 2015, they did underperform the S&P 500 Index significantly, rising 0.87 percent versus 5.28 percent for the index.


What To Do?

Tactical investors may want to reconsider any overweights to the three asset classes mentioned.


On the other hand, strategic investors may be well advised to focus on a disciplined strategic allocation to a diversified set of global asset classes and weigh all factors before making any target changes.


Again, with interest-rate risk still historically high, we are paying close attention to interest rate sensitive assets and reviewing them frequently.


At the time of writing, ValMark Advisers, Inc. held shares of RWR and DVY in client accounts.

ValMark Advisers Inc. is the manager of the TOPS® Portfolios of ETFs. ValMark started managing "TOPS" separately managed accounts of ETFs in 2002. The firm manages more than $5.1 billion in ETFs for retail and institutional clients in multiple investment products. Email:[email protected], Phone: 800-765-5201. For a complete list of relevant disclosures, please click here.



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