ETFs To Play In A Rising Rate Environment

Inverse bond ETFs like ProShares Ultrashort 20+ Year Treasury ETF (TBT) are also becoming increasing popular with investors as they provide an opportunity to profit from rising interest rates. However investors need to remember that they are powerful but complex tools and are not meant for long-term buy and hold investors.

Rising Rates = An Improving Economy; Invest in Cyclical Sectors

Many investors fear that rising rates will kill the stock market rally, but the fact is that the increase in rates reflects an improving economy and lower risk of deflation—which are positive for stocks. While economy is certainly not going to start growing at breakneck speed anytime in near future, the overall economic picture continues to brighten slowly.

Increase in interest rates are bad for stocks only when the central bank raises them to combat inflation, which is not going to be the case anytime in the near future.

There are some sectors that will benefit more in the improving economic environment and this may be right time for investors to start repositioning their portfolio with higher allocation to some of the cyclical sectors like technology, industrials and energy that have a better earnings growth outlook for 2014, compared to the current year.

Some of the ETFs from these sectors like Industrial Select Sector SPDR (XLI), Vanguard Information Technology ETF (VGT) are worth considering.  If the labor and housing markets continue to recover, consumer discretionary and retail sectors may also continue their outperformance. (Read:3 Top Ranked Consumer ETFs to buy now)

Regional banks benefit in the current environment of rising longer-term rates and steepening yield curve. Investors could look at SPDR S&P Regional Banking ETF (KRE).

This article is brought to you courtesy of Neena Mishra From Zacks.

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