The conversation about sectors that are inversely correlated to rising Treasury yields often focuses on real estate and utilities, but consumer staples are often viewed as vulnerable to hawkish moves by the Federal Reserve.

Heading into 2017, expectations were in place for the Fed to boost interest rates multiple times, something that remains a legitimate possibility. Still, the Consumer Staples Select Sector SPDR (XLP), the largest exchange traded fund (ETF) dedicated to staples stocks, is up more than 6% year-to-date.

Data suggest there has recently been some enthusiasm for the defensive, low beta XLP. For the week ended March 2nd, investors added about $615 million in new money to XLP. That is good for that week's biggest inflows to a sector ETF and placed XLP third among US-listed ETFs for new money added over that period. Those inflows turned XLP's year-to-date flows data from negative to positive as the ETF is now heavier by more than $321 million since the start of the year.

However, XLP and its staples brethren are not out of the rate hike woods. On Friday, Federal Reserve Chair Janet Yellen signaled the Fed is likely to boost borrowing costs when it meets later this month, news that sent XLP lower along with the broader market.

Part of the reason investors often eschew the consumer staples sector when interest rates rise is that those rising rates are often accompanied by a stronger dollar. Many XLP components, think big names such as Procter & Gamble (PG) and Coca-Cola Co. (KO), generate significant portions of their sales outside the U.S. That means those sales are converted from a weaker currency into a stronger dollar, equaling the potential for an earnings pinch.

Although staples are often thought of as bond proxies, XLP's 10-year correlation to the iShares 20+ Year Treasury Bond ETF (TLT) is relatively low. Over those 10 years though, XLP is negatively correlated to the U.S. Dollar Index, confirming the point that the sector is not an ideal strong dollar destination.

Past performances are not guarantors of future returns, but they do paint the picture of the potential for staples to lag when rates rise. The Fed increased rates once each in 2015 and 2016. XLP managed to outperform the S&P 500 in 2015 but trailed the benchmark U.S. equity index last year. In 2013, the year of the infamous taper tantrum, XLP rose an impressive 26.3%, but that trailed the S&P 500 by 600 basis points.

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