The 10-year Treasury yield has returned to levels near 5%, prompting a look at how this environment affects growth-heavy exchange-traded funds compared to value-focused funds. The benchmark yield briefly crossed the 5% mark this week before retreating to a range of 4.95% to 4.99%.
Historical data suggests that when the 10-year Treasury yield carries a 5-handle, equity returns tend to weaken. According to a Substack article by Bespoke Investment Group, on trading days since 1962 when the yield was at 5%, the S&P 500 averaged a 0.4% gain over the following three months, with positive returns occurring 56% of the time. Over six months and one year, average gains were 1.3% and 4.1%, respectively, compared to long-term averages of 2.2%, 4.4%, and 9.1%.
The Invesco QQQ Trust (NASDAQ: QQQ), which tracks the Nasdaq-100, faces specific pressure due to its rate sensitivity. The fund has substantial exposure to mega-cap technology and AI-related companies. As of the report, Nvidia accounted for 8.34% of the ETF, Apple for 7.90%, Microsoft for 6%, and Micron Technology for 4.69%. Higher Treasury yields can increase the discount rate applied to future earnings, making relatively low-risk bonds more competitive with equities.
Market data from ChartVault indicated that as of September 1, the S&P 500’s earnings yield was 3.88% against a 10-year Treasury yield of 5.01%. This spread highlights the valuation gap between stocks and Treasuries.
In contrast, the Vanguard Value ETF (NYSE: VTV) tracks large-cap value stocks rather than the Nasdaq-100’s growth universe. As of July 31, VTV held 308 stocks with a price-to-earnings ratio of nearly 21x. Recent performance over the three months ending September 16 showed QQQ fell approximately 2.5%, while VTV gained 1.5%.
The article notes that a 5% Treasury yield is not a definitive sell signal for QQQ, but it represents a higher hurdle for richly valued growth exposure. The relative performance of value will still depend on earnings, economic growth, and sector composition.
