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ETF Tricks to Stave Off Rising Rate Risks This Halloween
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The dual prospects of another Fed rate hike this year and reverse QE as well as the European Central Bank’s (ECB) announcement of tapering are likely to push the U.S. Treasury yields higher in the coming days. Already yield on the 10-year U.S. Treasury note increased to 2.46% on Oct 26 from the month’s lowest of 2.28% on Oct 13.
Added to this, the House of Representatives just about okayed a $4 trillion budget on Oct 26 in a 216-212 vote that made Trump’s tax reform plans even more likely. This pushed up PowerShares DB US Dollar Bullish ETF (UUP - Free Report) on Oct 26 by 1.1% and contributed to the rise in bond yields.
Many investors may see the impending rising rate risks as goblins prior to the Halloween. This makes it necessary for investors to have a look at the ETF strategies that can protect them from any threats.
ETF Strategies
Bet on Banks
We believe that bank stocks are good bets now in a rising rate environment. Apart from rising rates, talks of Trump’s tax cut plans are likely to bring good news for bank stocks. SPDR S&P Bank ETF (KBE - Free Report) and PowerShares KBW Regional Banking ETF (KBWR - Free Report) should prove to be lucrative bets now.
Go Short with Rate-Sensitive Sectors
Needless to say, sectors that perform well in a low interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares Short Real Estate (REK - Free Report) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment (read: Rate Hike Bet Put These Inverse Sector ETFs in Focus).
Play Niche Bond ETFs
Floating rate notes are investment grade bonds that 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 the issuers. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context (read: FLOT vs. FLRN: The Best Floating Rate ETF).
Another option in this space is to tap bank loan ETFs like Highland/iBoxx Senior Loan ETF . Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. It yields about 4.59% annually (read: 5 Bond ETFs for a Rate-Proof Portfolio).
By investing in investment grade bonds portfolio Proshares Investment Grade-Interest Rate Hedged (IGHG - Free Report) , investors can alleviate rising rate worries through an interest rate hedge approach using U.S. Treasury futures. Since the fund targets a duration of zero, this could be an intriguing play right now. The fund yields about 3.27% annually.
Last but not the least, who can forget inverse bond ETFs in such a scenario? The product Barclays Inverse US Treasury Aggregate ETN looks to track the sum of returns of periodically rebalanced short positions in equal face values of each of the Treasury Futures contracts (see all Inverse Bond ETFs here).
Ex-Rate Sensitive ETFs Deserves a Look
Since both fears of a bubble in the market and the likely steepening of the yield curve may cause considerable volatility, a low volatile and an ex-rate sensitive pick like PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV - Free Report) should be an intriguing choice.
High Dividend ETFs to Rescue
Investors can seek refuge in even higher yield securities. So, PowerShares S&P 500 High Dividend Portfolio (SPHD - Free Report) yielding about 3.53% annually, can be a nice bet in a rising rate environment. Fidelity Dividend ETF for Rising Rates (FDRR - Free Report) can also be a good pick right now.
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ETF Tricks to Stave Off Rising Rate Risks This Halloween
The dual prospects of another Fed rate hike this year and reverse QE as well as the European Central Bank’s (ECB) announcement of tapering are likely to push the U.S. Treasury yields higher in the coming days. Already yield on the 10-year U.S. Treasury note increased to 2.46% on Oct 26 from the month’s lowest of 2.28% on Oct 13.
Added to this, the House of Representatives just about okayed a $4 trillion budget on Oct 26 in a 216-212 vote that made Trump’s tax reform plans even more likely. This pushed up PowerShares DB US Dollar Bullish ETF (UUP - Free Report) on Oct 26 by 1.1% and contributed to the rise in bond yields.
Many investors may see the impending rising rate risks as goblins prior to the Halloween. This makes it necessary for investors to have a look at the ETF strategies that can protect them from any threats.
ETF Strategies
Bet on Banks
We believe that bank stocks are good bets now in a rising rate environment. Apart from rising rates, talks of Trump’s tax cut plans are likely to bring good news for bank stocks. SPDR S&P Bank ETF (KBE - Free Report) and PowerShares KBW Regional Banking ETF (KBWR - Free Report) should prove to be lucrative bets now.
Go Short with Rate-Sensitive Sectors
Needless to say, sectors that perform well in a low interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares Short Real Estate (REK - Free Report) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment (read: Rate Hike Bet Put These Inverse Sector ETFs in Focus).
Play Niche Bond ETFs
Floating rate notes are investment grade bonds that 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 the issuers. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context (read: FLOT vs. FLRN: The Best Floating Rate ETF).
Another option in this space is to tap bank loan ETFs like Highland/iBoxx Senior Loan ETF . Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. It yields about 4.59% annually (read: 5 Bond ETFs for a Rate-Proof Portfolio).
By investing in investment grade bonds portfolio Proshares Investment Grade-Interest Rate Hedged (IGHG - Free Report) , investors can alleviate rising rate worries through an interest rate hedge approach using U.S. Treasury futures. Since the fund targets a duration of zero, this could be an intriguing play right now. The fund yields about 3.27% annually.
Last but not the least, who can forget inverse bond ETFs in such a scenario? The product Barclays Inverse US Treasury Aggregate ETN looks to track the sum of returns of periodically rebalanced short positions in equal face values of each of the Treasury Futures contracts (see all Inverse Bond ETFs here).
Ex-Rate Sensitive ETFs Deserves a Look
Since both fears of a bubble in the market and the likely steepening of the yield curve may cause considerable volatility, a low volatile and an ex-rate sensitive pick like PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV - Free Report) should be an intriguing choice.
High Dividend ETFs to Rescue
Investors can seek refuge in even higher yield securities. So, PowerShares S&P 500 High Dividend Portfolio (SPHD - Free Report) yielding about 3.53% annually, can be a nice bet in a rising rate environment. Fidelity Dividend ETF for Rising Rates (FDRR - Free Report) can also be a good pick right now.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>