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Play 4 Rate-Proof Bond ETFs in a Rising Rate Environment

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Rising rate worries started bothering both equity and bond markets from February-end. Growing vaccine distribution and hopes of hefty stimulus under the Biden presidency along with a dovish Fed stoked inflationary pressure and boosted long-term treasury yields (read: Top ETF Stories of February Worth Watching in March).

U.S. benchmark Treasury yields started February with 1.09% and ended the month at 1.44%, having hit a high of 1.60% (the maximum in a year) in the final week of the month. As of Mar 3, 2021, the benchmark U.S. treasury yield was 1.47%.

The S&P 500 (down 0.3%), the Dow Jones (up 1.8%), the Nasdaq Composite (down 4.5%) and the small-cap Russell 2000 (up 2.4%) offered a mixed performance past month, with value stocks gaining an upper hand.

iShares 20+ Year Treasury Bond ETF (TLT - Free Report) lost about 6.8% past month. No wonder, in the face of rising bond yields, investors might be fearing fixed-income investing as yields and bond prices are inversely related.

But there are fixed income ways that would help investors mitigate such threats yet prove profitable. Below we highlight a few of them:

iShares Floating Rate Bond ETF (FLOT - Free Report)

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 issuers.

Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. FLOT has an effective duration of 0.13 years and thus presents minimal interest rate risks (see all Investment Grade Corporate Bond ETFs here).

Highland/iBoxx Senior Loan ETF (SNLN - Free Report)

Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, these give protection to investors in any event of liquidation. As a result, default risk is low for such bonds, even after belonging to the junk bond space (read: Worried About Higher Interest Rates? Buy These Four ETFs to Profit).

Senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better in the first half of 2021. SNLN could thus be a good pick for the upcoming plays. It yields around 2.75% annually.

Vanguard Short-Term Bond ETF (BSV - Free Report)

Higher rates might lead to huge losses for investors who do not hold bonds until maturity. As a result, a short-duration bond ETF like BSV acts as a better hedge to rising rates. U.S. government bonds take about 66.73% of the fund, with A-rated and Baa-rated bonds each receiving 12.50% of weight.  The average maturity and effective duration are 2.9 years. It charges 5 bps in annual fees (see: all the total Bond Market ETFs here).    

The WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund (AGZD - Free Report)

AGZD looks to combine a long position in cash bonds representative of AGG with a short position in Treasury Bonds and/or Treasury futures to target the zero-interest rate exposure. Such technique of interest-rate hedging makes the fund well positioned to play in a rising rate environment.

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