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Fed Rate Cut Bets Ease: 5 ETF Areas at a 52-Week High
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Wall Street experienced a slump on Jan 17, 2024 as the Fed rate cut bets eased. Investors scaled back their expectations for imminent Fed interest rate cuts. Fed Governor Chris Waller expressed his belief that the Fed could lower interest rates in the coming year as long as inflation remains in check.
Fed Governor Chris Waller emphasized that the timing and extent of rate cuts would depend on incoming data. As a reflection of the changing expectations surrounding Fed rate cuts, investor bets place a 57% chance the Fed cuts in March, as of Wednesday (per the CME FedWatch Tool). That's down from a 67% chance last week and a 71% chance seen a month ago.
ECB president Christine Lagarde on Wednesday joined the likes of Federal Reserve governor Chris Waller in warning that expectations of imminent loosening are too high, as quoted on Yahoo Finance. The S&P 500 dipped 0.6% on Jan 17, 2024 while the Dow Jones slumped 0.3% and the Nasdaq retreated 0.6% on the day.
Against this backdrop, below we highlight a few winning ETF areas that benefit from rising rates. These ETFs are currently trading at a 52-week high.
Rising Rate Bonds
FolioBeyond Alternative Income and Interest Rate Hedge ETF (RISR - Free Report) – Up 2.1% on Jan 17, 2024
The fund has a dividend yield of 7.78% and invests primarily in interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. The product charges 99 bps in annual fees.
The interest rate hedge corner of the broad ETF world has been popular lately as bets over imminent Fed rate cuts this year weakened. The U.S. three-month Treasury yield was 5.47% on Jan 17, 2024, up 2 bps from the day before while benchmark treasury yield was 4.10% on Jan 17, 2024, up 3 bps from the prior day.
The underlying FTSE Corporate Investment Grade (Treasury Rate-Hedged) Index comprised of long positions in USD-denominated investment grade corporate bonds issued by both US & foreign domiciled companies; & short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index thus seeks to achieve an overall effective duration of zero. The fund charges 30 bps in fees and yields 4.94% annually.
Floating Rate Bond iShares ETF (FLOT - Free Report) – Up 0.04%
Floating rate bond has been an area to watch lately, given the fears over higher rates for longer than expected. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
FLOT yields 5.64% annually while ICLO yields 7.06%. The expense ratio of ICLO is 0.26% and the same for FLOT is 15 bps.
Short-Term Bonds
1-3 Month T-Bill Barclays Capital SPDR (BIL - Free Report) – Up 0.02%
Short Treasury Bond iShares ETF (SHV - Free Report) – Up 0.02%
The short-term corner of the Treasury market has been an area to watch lately, given rising rates. Short-term bond ETFs are less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion against rising rates. Moreover, these bonds are yielding high.
The fund SHV yields 4.72% annually while BIL yields 4.91% annually. BIL charges 14 bps in fees and SHV charges 15 bps in fees.
The underlying Indxx REIT Preferred Stock Index is comprised of preferred securities listed on U.S. exchanges that are issued by real estate investment trusts. The fund charges 45 bps in fees and yields 7.70% annually.
A preferred stock is a hybrid security that has characteristics of both debt and equity. These do not have voting rights but a higher claim on assets than common stock. That means that dividends to preferred stock holders must be paid before any dividend is paid to the common stock holders.
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Fed Rate Cut Bets Ease: 5 ETF Areas at a 52-Week High
Wall Street experienced a slump on Jan 17, 2024 as the Fed rate cut bets eased. Investors scaled back their expectations for imminent Fed interest rate cuts. Fed Governor Chris Waller expressed his belief that the Fed could lower interest rates in the coming year as long as inflation remains in check.
Fed Governor Chris Waller emphasized that the timing and extent of rate cuts would depend on incoming data. As a reflection of the changing expectations surrounding Fed rate cuts, investor bets place a 57% chance the Fed cuts in March, as of Wednesday (per the CME FedWatch Tool). That's down from a 67% chance last week and a 71% chance seen a month ago.
ECB president Christine Lagarde on Wednesday joined the likes of Federal Reserve governor Chris Waller in warning that expectations of imminent loosening are too high, as quoted on Yahoo Finance. The S&P 500 dipped 0.6% on Jan 17, 2024 while the Dow Jones slumped 0.3% and the Nasdaq retreated 0.6% on the day.
Against this backdrop, below we highlight a few winning ETF areas that benefit from rising rates. These ETFs are currently trading at a 52-week high.
Rising Rate Bonds
FolioBeyond Alternative Income and Interest Rate Hedge ETF (RISR - Free Report) – Up 2.1% on Jan 17, 2024
The fund has a dividend yield of 7.78% and invests primarily in interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. The product charges 99 bps in annual fees.
The interest rate hedge corner of the broad ETF world has been popular lately as bets over imminent Fed rate cuts this year weakened. The U.S. three-month Treasury yield was 5.47% on Jan 17, 2024, up 2 bps from the day before while benchmark treasury yield was 4.10% on Jan 17, 2024, up 3 bps from the prior day.
Rate-Hedged ETFs
Investment Grade-Interest Rate Hedged ETF (IGHG - Free Report) – Up 0.3%
The underlying FTSE Corporate Investment Grade (Treasury Rate-Hedged) Index comprised of long positions in USD-denominated investment grade corporate bonds issued by both US & foreign domiciled companies; & short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index thus seeks to achieve an overall effective duration of zero. The fund charges 30 bps in fees and yields 4.94% annually.
Floating Rate Bonds
Invesco AAA Clo Floating Rate Note ETF (ICLO - Free Report) – Up 0.08%
Floating Rate Bond iShares ETF (FLOT - Free Report) – Up 0.04%
Floating rate bond has been an area to watch lately, given the fears over higher rates for longer than expected. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
FLOT yields 5.64% annually while ICLO yields 7.06%. The expense ratio of ICLO is 0.26% and the same for FLOT is 15 bps.
Short-Term Bonds
1-3 Month T-Bill Barclays Capital SPDR (BIL - Free Report) – Up 0.02%
Short Treasury Bond iShares ETF (SHV - Free Report) – Up 0.02%
The short-term corner of the Treasury market has been an area to watch lately, given rising rates. Short-term bond ETFs are less vulnerable to rising rates. As the duration or interest rate sensitivity is lower, these act as a cushion against rising rates. Moreover, these bonds are yielding high.
The fund SHV yields 4.72% annually while BIL yields 4.91% annually. BIL charges 14 bps in fees and SHV charges 15 bps in fees.
Preferred ETFs
Infracap REIT Preferred ETF (PFFR - Free Report) – Up 0%
The underlying Indxx REIT Preferred Stock Index is comprised of preferred securities listed on U.S. exchanges that are issued by real estate investment trusts. The fund charges 45 bps in fees and yields 7.70% annually.
A preferred stock is a hybrid security that has characteristics of both debt and equity. These do not have voting rights but a higher claim on assets than common stock. That means that dividends to preferred stock holders must be paid before any dividend is paid to the common stock holders.