Go on the offensive with EQRR as the Fed prepares to hike rates

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Interest rates are rising. And, with the Federal Reserve now embarking on its rate hike path and on the cusp of quantitative tightening, they likely still have a lot to do. This is an environment where ProShares Equities for Rising Rates ETF (EQRR) can offer investors an opportunity to outperform traditional large cap US indices.

The fund, which tracks the performance of the Nasdaq US Large Cap Equities for Rising Rates Index™ (NQERR™), uses a rules-based strategy, targeting five sectors and 10 stocks in each of those sectors that have the highest correlations. higher with 10-year US Treasury returns. These sectors – including financials, energy, materials and industrials – have fairly intuitive links to rising rates. For example, financials often have higher margins in a rising rate environment. Energy and materials stocks should also benefit from the inflation that usually accompanies rising rates. The fifth and smallest sector allocation is currently technology, but also has rotation in telecommunications, consumer discretionary and healthcare. The index is reconstituted using this rules-based approach on a quarterly basis, allowing sectors and stocks to keep pace with changing market conditions.

“It’s an ETF that can turn rising interest rates into an equity investment opportunity,” said Simeon Hyman, global investment strategist at ProShares, in a recent interview with TradeTalks. “That can be a very effective satellite for a large-cap core allocation to try to take a bit of an offensive stance when those interest rates go up.”

The Fed’s dot chart and comments from Fed Chairman Powell make it clear that March’s 25 basis point rate hike will likely be the first of many. Powell also said the Fed was on the verge of shrinking its balance sheet. The upcoming quantitative tightening marks a notable break from Fed practice after the 2007-09 financial crisis, as the central bank waited two years to end its quantitative easing program after raising rates in 2015.

Without quantitative easing to remove long-term interest rates, the 10-year Treasury yield rose above 2%, a significant increase from the all-time low of 0.51% in August 2020. Since then, the index EQRR’s underlying, the Nasdaq US Large Cap Equities for Rising Rates Index™, more than doubled the return of the S&P 500.

Source: Bloomberg, 8/4/20-3/31/22. Index returns are indicative and do not represent the actual performance of the fund. Index returns do not reflect management fees, transaction costs or expenses. Indices are unmanaged and you cannot invest directly in an index. Past performance does not guarantee future results.

“When most people hear about an interest rate hike, they immediately think they need to rush to their bond portfolio and play some kind of defense, which certainly can be true, but there is actually has an opportunity to reposition your equity portfolio offensively and take advantage of some of the sectors and stocks that could do better in a rising rate environment,” Hyman said.


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