Industrial ETFs For Rising Interest Rates

As Treasury yields have soared over the past three months, investors have been reminded about what sectors are sensitive to rising rates. The list includes predictable suspects such as income-generating asset classes such as MLPs and REITs. At the sector level, utilities and telecom names have reputations for being rate-sensitive groups. Related: Rising Rates A Problem For Some Dividend ETFs. But what about the sectors and corresponding ETFs that have proven sturdy has rates have risen? There are a few, believe it or not. Over the past three months, the time period in which tapering chatter has escalated causing the subsequent rise in 10-year yields, the Consumer Discretionary Select Sector SPDR XLY and other discretionary funds have outperformed their sector brethren. This despite the fact that the sector has been a leadership group for several years and is now viewed as richly valued. Another batch of sector ETFs that have stood tall in the face of rising rates are industrial funds. Since May 20, the Industrial Select Sector SPDR XLI, the Vanguard Industrial ETF VIS and the iShares U.S. Industrials ETF IYJ were all higher by 1.6 percent heading into the start of Wednesday's trading session. Industrial ETFs actually have a long-standing penchant for durability in the face of rising rates. For the 1,202-day period ending May 31, 2013 that saw the iShares 20+ Year Treasury Bond ETF TLT fall in each of those days, meaning long-term Treasury yields rose, XLI notched 787 up days, according to ETF Replay data. That is the highest number of up days under the "TLT trades down" scenario of the nine sector SPDR ETFs. Importantly, the data also show that XLI also had the lowest number of down days at 393, well ahead of the next-best fund on that metric, the Technology Select Sector SPDR XLK. Industrial ETFs performing well as rates rise is not a new concept. In fact, during prolonged periods of Treasury bond weakness, the aforementioned industrial funds have soared. For example, from August 16, 2010 through January31, 2011, TLT slid 11.5%. In a sign of just how strong industrial ETFs were over that period, VIS was the worst performer of the trio mentioned here, rising "just" 24.8 percent. In another testament to the temerity of industrial ETFs in rising rate environments, of XLI's top-10 holdings, only General Electric GE, Union Pacific UNP and Caterpillar, have traded lower over the past 90 days. That is significant because XLI's top-10 holdings represent 49.1 percent of the ETF's weight. For more on ETFs, click here. Disclosure: Author owns none of the securities mentioned here.