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

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.
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