Rising US Rates: What Has Historically Performed Best?

Past performance is not an indication of future performance. Table shows index performance, not ETF performance, and doesn’t take into account ETF management costs. You cannot invest directly in an index.

Cybersecurity is not a renowned play on rising rates, but nor is it a “bond proxy”. One suggestion for this performance is that, generally, environments where interest rates are in ‘upswing’ and periods of economic expansion may favour growth stocks or sectors. And there is no doubt that cybersecurity fits into a growth category. That said, whilst these results in this data set are certainly impressive, I would caution that this is a relatively new sub-sector, and thus a very limited sample size of 3 periods.
If you like the thematic anyway (and there are plenty of reasons to like it in my view) then maybe the results above could be an added support for a positive view.
Investors with an interest in cybersecurity may be interested in our HACK ETF (note the ETF tracks the Nasdaq Cybersecurity Index not the ISE Cybersecurity Index).

Japanese equities have a long-standing reputation as one of, if not the best, investment opportunities during rising US rates. This is because rising rates generally tend to push up the US$ which correspondingly tend to push down the Yen. Japanese equities have long been observed to do well when the Yen is falling against the global benchmark US dollar. This is unsurprising, given they are a large export nation and should benefit from the likely positive double whammy of stronger exports to their key trading partner, the USA (rising rates from a cycle bottom generally signal a strong economy) and the fact that a lower Yen translates to stronger domestic earnings for their key exporters and, as we know, earnings drive equity performance.

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BetaShares offers a hedged Japanese equities fund – ASX Code: HJPN

While there is a little less of a sample size on this sector than some of the others, the performance trend is interesting enough to note. Returns have been fairly consistent at +15-25% if you exclude the 2015 result. I was surprised by this one as normally you would expect higher US rates to result in a higher US dollar which would normally be negative for commodity prices, at least in the short term. I suspect there may be an element of reverse causation here, where instead of rising rates pushing agriculture companies higher, it may in fact be that higher commodity prices have sent the agriculture companies higher, which in turn has spiked inflation and lead to rising U.S. 10yr yields.

BetaShares offer investors exposure to Global Agriculture Companies – see ASX Code: FOOD

Again, no surprises here. Rising rates are a sign of strong domestic economy and are expected to be beneficial for banks’ net interest margins and subsequent profitability…. Would be alongside Japanese Equities as one of the most recognised ways to play the theme.
If you have an interest in this sector, you may wish to consider ASX Code: BNKS

I’d be thinking this is just a cyclical trade….. Rising US rates could be indicative of a strong US (and global?) economy and Australian small caps, being a cyclical play, would likely benefit from such an environment.

• No.11: U.S Large Cap – Performance average +7.97%
• No.12 : Global Gold Miners – Performance average +6.70%
• No.13 : Global Infrastructure – Performance average +5.46%
• No.14 : Global Healthcare – Performance average +4.34%
• No.15 : Global Telecoms – Performance average +2.76%

Whilst long term data is often considered more robust than short term data, it is worth noting that if we only look at the more recent data of the 3 most recent periods of rising rates from July 2012, the best performers of more recent times have been the more “traditional” rising US rates plays of Global Banks, with an average increase over that shorter data set of 32.7%, and Japanese Equities, with an average return of 29.7% over the same period.

We hope this analysis provides useful talking points around the BBQ with friends or in your chat rooms with fellow investors and potentially helps with portfolio positioning considerations as we enter what is likely to be a new U.S. interest rate environment. Remember, past performance trends in a rising rate environment are not necessarily indicative of future trends.

Written By: Peter Harper