Another Way To Play Declining Interest Rates

With Treasury yields on a seemingly unabated decline in the U.S. and market participants expecting more interest rate cuts by the Federal Reserve, there is plenty of chatter about investment strategies for a low rate environment.

What Happened

At the industry level, one of the prime beneficiaries of lower interest rates are homebuilders stocks. The Dow Jones U.S. Select Home Construction Index (DJSHMBT), one of the most widely followed gauges of that group, is higher by nearly 29% year-to-date.

Additionally, there is some insulation from geopolitical headwinds with homebuilders because it's a heavily domestic industry. Just look at the Dow Jones U.S. Select Home Construction Index, which is lower by 0.59% month-to-date compared to a loss of 4.40% for the S&P 500.

Why It's Important

For active, risk-tolerant traders, the Direxion Daily Homebuilders & Supplies Bull 3X Shares NAIL could be an appropriate leveraged ETF to consider over the near-term. NAIL looks to deliver triple the daily returns of the Dow Jones U.S. Select Home Construction Index.

Some analysts see catalysts at play that could bode well for the industry and that could spark some near-term upside in NAIL, a fund that has nearly doubled in value this year.

“On Thursday, Jefferies analyst Sean Darby also highlighted the trade war and expectations about the Federal Reserve’s next moves that have pushed Treasury rates and, as a consequence, mortgage rates, to fresh lows, while the 'ongoing dollar strength and weakness in global manufacturing ought to keep the S&P 500 home builders well bid,'” reports Barron's.

For NAIL, the short-term risk is that if the ETF is pushed below $45 on aggressive selling, it could tumble all the way to the $39 to $40 area.

What's Next

Bearish traders betting on that type of decline for homebuilders stocks over the near-term may be disappointed. While there are no guarantees NAIL is going to move higher, homebuilder fundamentals bode well for the triple-leveraged fund.

“The sector has unique characteristics such as its homogenous U.S. sales and improving affordability that are missing in other S&P 500 sectors,” reports Barron's, citing Jefferies' Darby.

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