Utilities and pipeline companies
Patrick Horan, a portfolio manager at Agilith Capital Inc., recommends shorting two exchange-traded funds: the Dow Jones Utilities Titans 30 index ETF and Alerian MLP ETF (includes pipeline master limited partnerships) – or their Canadian equivalents. Utilities and MLPs are high yield plays but their “business models will suffer from the rising rate environment,” he says. “They are, for the most part, highly levered companies that have binged on cheap acquisition credit over the last three years.”
Mr. Horan believes yields on North American 10-year bonds will climb to the range of 4 per cent to 6 per cent over the next couple of years. As a result, he projects that the cost of debt for companies in the utility and MLP space will ratchet upward by 700 to 1,100 basis points, “forcing dividend cuts and even possibly defaults on their bond and credit obligations – leaving shareholders with very poor future returns.”