Hello! This is MarketWatch reporter Isabel Wang bringing you this week\u2019s ETF Wrap. In this week\u2019s edition, we look at how ETF investors can navigate the choppy financial markets which remain on edge after a sell-off in U.S. government bonds drove long-term borrowing costs to the highest level in more than a decade, undercutting stock prices.<\/p>\n
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A renewed rout in the U.S. government bond markets that sent the yield on the 10-year Treasury bond to 16-year highs as a new era of higher-for-longer interest rates takes hold, is leaving ETF investors scrambling for the exits on a wide range of exchange-traded funds in the past week, most notably the iShares 20+ Year Treasury Bond ETF TLT, one of the most popular fixed-income ETFs that tracks a market-weighted index of the U.S. Treasury bonds with maturities of 20 years or more, earlier this week suffered its lowest close since the early days of the 2007-2009 financial crisis. The yield on the 10-year Treasury\u00a0 See:<\/strong> Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007<\/p>\n The bond market, particularly the U.S. Treasury market, has historically been less volatile and and has often performed better than other financial assets during economic slowdowns. However, that doesn\u2019t mean bonds don\u2019t come without their own risks.<\/p>\n Rising yields reflect a diminishing price for the securities when interest rates rise, and hit existing holders of Treasuries.<\/p>\n See:<\/strong> Rising Treasury yields are upsetting financial markets. Here\u2019s why.<\/p>\n The surprising strength of the U.S. economy, as demonstrated by this week\u2019s labor-market data, coupled with hawkish talk from Federal Reserve officials indicating the central bank may need to keep tightening monetary policy, have led to the bond sell-off this week. <\/p>\n Meanwhile, a positive Treasury term premium, or the compensation that investors require for the risk of holding a Treasury to maturity, have also contributed to a steep sell-off as a ballooning U.S. budget deficit and the Treasury\u2019s need to issue more debt have pushed Treasury prices to 16-year lows.<\/p>\n TLT \u201cIt is not insignificant\u2026 It really makes you think about how you\u2019re doing risk management because you can\u2019t have the piece of the portfolio that\u2019s supposed to be the risk mitigator falling the worst we\u2019ve ever seen in the equity-market fall. That\u2019s a big issue,\u201d Urbanowicz told MarketWatch.\u00a0<\/p>\n That\u2019s why ETF investors have very few options when developing or adjusting their asset allocation play in the higher-for-longer rates environment, but there are still some shockproof assets for safety, according to ETF strategists.\u00a0<\/p>\n ETF investors that still favor bonds can consider hiding in ultra short-term bond funds to avoid duration risk as the Fed may still need to raise interest rates to curb inflation by the end of 2023, said Neena Mishra, director of ETF research at Zacks Investment Research.\u00a0<\/p>\n The SPDR Bloomberg 1-3 Month T-Bill ETF Meanwhile, Mishra said investors who want active management with \u201cbetter navigation to the markets\u201d can consider the JPMorgan Ultra-Short Income ETF Despite the bond rout hitting the popular TLT fund hard as the 10-year Treasury yield surged, some retail traders have already started to buy the historic dip of the fund devoted to longer-dated Treasuries, said a team of Vanda Research data analysts led by Marco Iachini, senior vice president.<\/p>\n TLT attracted a total of $686 million flows in the week to Wednesday, ranking the 8th out of over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data.\u00a0<\/p>\n Along with the strong \u201cdip buying\u201d in TLT, retail traders have also poured an \u201cunprecedented amount\u201d of capital into the utilities sector, Iachini and his team said in a Thursday note. The Utilities Select Sector SPDR Fund \u201cWhile purchases of utilities stocks are typically of a significantly smaller scale than purchases of tech stocks, the inflow seen over the past week is far larger than any other prior 5-day stretch, easily surpassing inflows into the sector at the onset of the Covid downturn,\u201d the Vanda team said. \u201cThe flip side of this dynamic is that institutional investors have likely lightened up their utilities exposure during this bond sell-off episode, making the sector a potentially more appealing equity bet should rates be nearing a local peak.\u201d\u00a0<\/p>\n See:<\/strong> Utilities stocks \u2018decimated\u2019 by rising rates fall into uncommon trading territory, Bespoke chart shows<\/p>\n Many small-cap stocks have traded at a significant discount to their larger-company counterparts, creating an attractive entry point for some investors who think the forward price-earnings ratio for small-caps are low enough to offer potential for outperformance in the longer run.\u00a0<\/p>\n However, small caps \u201cIt is really important right now not to just rely on a specific sector but really have that built-in risk management at the index level to take a lot of that guesswork out of the equation,\u201d he added.<\/p>\n See: <\/strong>Small-cap ETFs may look attractive as recession concerns fade, but blindly chasing the rally is not without risk<\/p>\n That\u2019s why Urbanowicz and his team at Innovator ETFs think the increasingly popular defined-outcome ETFs, or the \u201cbuffer\u201d funds, could limit the downside risk and help investors navigate a stormy rates environment.<\/p>\n See:<\/strong> An ETF that can\u2019t go down? This new \u2018buffer\u2019 fund is designed to provide 100% protection against stock-market losses<\/p>\n For example, the Innovator Equity Defined Protection ETF Meanwhile, the Innovator Defined Wealth Shield ETF \u201cA big reason [to consider this strategy] is it gives investors a place to not only maintain equity exposure, but also to hide out because they [funds] have known levels of risk management that are in place,\u201d he added.\u00a0<\/p>\n As usual, here\u2019s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.<\/p>\n
\n TLT.<\/span>
\n \u00a0<\/p>\n
\n BX:TMUBMUSD10Y
\n slipped 2 basis points to 4.715% on Thursday, after reaching 4.801% on Tuesday, its highest closing level since Aug. 8, 2007, according to Dow Jones Market Data.<\/p>\n
\n TLT
\n has fallen over 50% since its peak in August 2020, according to FactSet data. The losses are \u201cpretty much\u201d what the equity-market loss was from peak to trough during the global financial crisis, said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs.\u00a0<\/p>\nUltra short-term bond funds\u00a0<\/strong><\/h2>\n
\n BIL,<\/span>
\n which tracks all publicly issued U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, offers a yield of 5.43%. The fund attracted over $1 billion of inflows in the week to Wednesday, the largest inflows among over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data.\u00a0<\/p>\n
\n JPST,<\/span>
\n which is an actively managed fund that invests in a variety of debts including corporate issues, asset-backed securities, and mortgage-related debt as well as U.S. government and agency debt. JPST recorded $15 million of inflows in the past week and has yielded 5.76%, according to FactSet data.\u00a0<\/p>\nFlows into longer duration bonds, utilities sector<\/strong><\/h2>\n
\n XLU
\n recorded $141 million of inflows last week, according to FactSet data.\u00a0<\/p>\nSmall-caps are \u2018cheap for a reason,\u2019 so don\u2019t buy them too soon<\/strong><\/h2>\n
\n IWM
\n are by nature more sensitive to higher interest rates compared with a lot of the larger-cap stocks which have the ability to be \u201cnimble\u201d with strong cash flow, said Urbanowicz.<\/p>\nDefined-outcome ETFs<\/strong><\/h2>\n
\n TJUL,<\/span>
\n the \u201cfirst-of-its-kind\u201d fund, aims to offer investors the upside return of the SPDR S&P 500 ETF Trust
\n SPY
\n to a 16.62% cap, as well as a complete buffer against its downside over a two-year outcome period.\u00a0<\/p>\n
\n BALT
\n offers a 20% downside buffer on the SPY every three months, which is a \u201cvery shortened outcome period\u201d and doesn\u2019t require the equity market to actually go up for the strategy to appreciate a value, Urbanowicz said.\u00a0<\/p>\nThe good\u2026<\/h2>\n
\n
\n \n Top performers<\/strong><\/p>\n<\/td>\n \n %Performance<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n YieldMax TSLA Option Income Strategy ETF
\n TSLY\n <\/td>\n\n 6.2<\/p>\n<\/td>\n<\/tr>\n \n \n United States Natural Gas Fund LP
\n UNG\n <\/td>\n\n 2.0<\/p>\n<\/td>\n<\/tr>\n \n \n Quadratic Interest Rate Volatility & Inflation Hedge ETF
\n IVOL\n <\/td>\n\n 1.6<\/p>\n<\/td>\n<\/tr>\n \n \n Technology Select Sector SPDR Fund
\n XLK\n <\/td>\n\n 0.9<\/p>\n<\/td>\n<\/tr>\n \n \n ProShares Bitcoin Strategy ETF
\n BITO\n <\/td>\n\n 0.9<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data through Wednesday, October 4. Start date September 28.\u00a0Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.<\/p>\n<\/td>\n<\/tr>\n<\/table>\n \u2026and the bad<\/h2>\n
\n
\n \n Bottom performers<\/strong><\/p>\n<\/td>\n \n %Performance<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n AdvisorShares Pure U.S. Cannabis ETF
\n MSOS\n <\/td>\n\n -11.3<\/p>\n<\/td>\n<\/tr>\n \n \n Sprott Uranium Miners ETF
\n URNM\n <\/td>\n\n -10.6<\/p>\n<\/td>\n<\/tr>\n \n \n Global X Uranium ETF
\n URA\n <\/td>\n\n -10.2<\/p>\n<\/td>\n<\/tr>\n \n \n VanEck Oil Services ETF
\n OIH\n <\/td>\n\n -9.2<\/p>\n<\/td>\n<\/tr>\n \n \n SPDR S&P Oil & Gas Exploration & Production ETF
\n XOP\n <\/td>\n\n -9.1<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data <\/p>\n<\/td>\n<\/tr>\n<\/table>\n New ETFs<\/h2>\n