ETFs Positioned to Gain from Increasing Treasury Yields

Rising Treasury yields are reshaping the investment landscape, benefiting certain ETFs while posing challenges for others

ETFs Positioned to Gain from Increasing Treasury Yields
ETFs Positioned to Gain from Increasing Treasury Yields

New York: Treasury yields have been on the rise since early 2025. This surge is mainly due to uncertainty from the Fed about future rate cuts and inflation concerns linked to Donald Trump’s policies. The 10-year yield has jumped above 4.8%, the highest since November 2023, and is approaching 5%. This could make borrowing more expensive for both companies and households, which might slow down economic growth. Investors are getting a bit nervous about how long the current bull market in U.S. stocks can last, and bond investors are feeling the pinch. But not all is doom and gloom; some areas of the market are set to benefit from these rising yields.

So, why are yields climbing? Well, some positive economic data has raised questions about further interest rate cuts. A big factor is the impressive jobs report, showing the U.S. added 256,000 jobs in December, with unemployment dipping to 4.1%. Plus, manufacturing activity is looking better, with the Institute for Supply Management reporting a rise in its manufacturing PMI to 49.3, the best since March. This suggests that production is picking up and orders are increasing, which is a good sign for the economy.

The incoming Trump administration’s policies, like tax cuts and relaxed regulations, could also stoke inflation. The potential for higher tariffs on China and other countries has made investors a bit jittery, especially with the inauguration coming up on January 20.

Now, let’s talk about the winners in this scenario. The financial sector, especially banks, usually benefits from rising yields because they can earn more on loans while paying less on deposits. For instance, the SPDR S&P Bank ETF (KBE) gives you exposure to 95 banking stocks and has a solid asset base of $2.3 billion, trading around 2 million shares daily.

The energy sector also tends to do well when yields rise, especially if inflation is in the mix. More economic activity usually means higher energy demand, which can boost prices for oil and gas companies. The Energy Select Sector SPDR (XLE) is a popular choice here, with $33.7 billion in assets and a daily trading volume of about 12 million shares.

For those looking at Treasury bonds, rising yields can actually be a good thing for short-duration bond ETFs. These funds invest in bonds with less than a year’s duration, making them less sensitive to rate hikes. The JPMorgan Ultra-Short Income ETF (JPST) is a solid option, holding a diverse range of short-term, investment-grade bonds and trading around 6.6 million shares daily.

Lastly, floating rate bond ETFs are designed to thrive in rising yield environments. The iShares Floating Rate Bond ETF (FLOT) is a top pick, with $7.8 billion in assets and an average daily volume of 1.2 million shares. It invests in bonds whose interest payments adjust with changing rates, keeping income levels competitive.

If you want to stay updated on key ETF info, Zacks offers a free Fund Newsletter that covers top news and analysis weekly. Plus, you can download their report on the 7 Best Stocks for the Next 30 Days for free.

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