The Federal Reserve’s approach to fight skyrocketing inflation has raised the prospect of rate hikes this year, pushing the yields higher.
In the latest FOMC meeting, Fed Chair Jerome Powell stated that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise rates for the first time in more than three years.” Wall Street analysts are predicting as many as seven rate hikes this year. Goldman Sachs sees five rate hikes versus four previously, with the first increase in March while Bank of America projects seven rate hikes this year. According to the CME FedWatch tool, the market is pricing in five interest rate hikes for 2022, with the sixth one starting to gain traction for later in the year. The initial phase of increase will actually be good for stocks as it will reflect an improving economy. Plus, higher rates would attract more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. Against this backdrop, investors should be well prepared to protect themselves from higher rates. While there are a number of ways that could prove extremely beneficial in a rising rate environment, ETFs like SPDR S&P Insurance ETF ( KIE Quick Quote KIE - Free Report) , SPDR S&P Regional Banking ETF ( KRE Quick Quote KRE - Free Report) , Vanguard Value ETF ( VTV Quick Quote VTV - Free Report) , JPMorgan Ultra-Short Income ETF ( JPST Quick Quote JPST - Free Report) and iShares Floating Rate Bond ETF ( FLOT Quick Quote FLOT - Free Report) from different corners of the market seem compelling picks. SPDR S&P Insurance ETF ( KIE Quick Quote KIE - Free Report) , offering exposure to insurance stocks, is one of the prime beneficiaries of a rate hike. The insurance stocks are able to earn higher returns on their investment portfolio of longer-duration bonds. But at the same time, these firms incur loss as the value of longer-duration bonds goes down with rising interest rates. Nevertheless, since insurance companies have long-term investment horizons, they can hold investments until maturity and hence, no actual losses will be realized. SPDR S&P Regional Banking ETF ( KRE Quick Quote KRE - Free Report) provides exposure to the regional banks’ segment. As banks seek to borrow money at short-term rates and lend at long-term rates, the rise in interest rates will earn more on lending and pay less on deposits, leading to a wider spread. This will expand net margins and increase banks’ profits (read: Count on Bank ETFs as Rates Rise). Vanguard Value ETF ( VTV Quick Quote VTV - Free Report) targets the value segment of the broad U.S. stock market. Higher yields suggest improving economic activities and that would result in increased industrial activity and a pickup in consumer demand, thereby lifting value stocks. Additionally, the wider spread of vaccinations, new vaccines as well as solid corporate earnings bode well for the value ETFs. JPMorgan Ultra-Short Income ETF ( JPST Quick Quote JPST - Free Report) invests mainly in short-duration investment-grade, U.S. dollar-denominated fixed, variable and floating-rate debt. The short-duration bonds are less vulnerable and a better hedge to rising rates (read: Cash-Like ETFs Gaining Popularity Ahead of Rate Hikes). iShares Floating Rate Bond ETF ( FLOT Quick Quote FLOT - Free Report) is an ideal choice for protecting investors against capital erosion in a rising rate environment.