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New York Fed President John Williams recently said he expects interest rates to continue higher and to remain at those levels until inflation is controlled, as quoted on CNBC. Fed chief Powell too recently commented that taming U.S. inflation will cause "pain" for American families and businesses as rate hikes will continue.
As rising rate worries have been prevalent with the Fed hiking rates faster and fatter this year, both the bond and stock investing are at worse. The Federal Reserve raised the target range for the fed funds rate by 75bps to 2.25%-2.5% during its July 2022 meeting, marking the fourth consecutive rate hike.
Per CME group, there is 70.5% probabilities of a 75-bp rate hike in the September meeting while 29.5% probability is of a 50-bp rate hike. Against this backdrop, below we highlight a few ETFs that could gain amid rising rate environment.
This ETF offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared with traditional bonds. As such, unlike fixed coupon bonds, these will not lose value when the rates go up. Hence, it protects investors from capital erosion in a rising rate environment. The fund charges 15 bps in fees.
iShares Interest Rate Hedged High Yield Bond ETF (HYGH)
The underlying BlackRock Interest Rate Hedged High Yield Bond Index mitigates the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. It charges 52 bps in fees and yields 4.61% annually.
This ETF is active and does not track a benchmark. The Simplify Interest Rate Hedge ETF seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.
The fund’s strategy includes initial investment of 50% of NAV in 7-year OTC payer swaption on the 20-year rate struck at 4.25%, providing direct exposure to rising rates. Option position is a strategic exposure to interest rates, expected to be reset only after extended periods of time or extreme rate moves. Option term and rate maturity are chosen to minimize cost of ownership; option strike and term chosen to maximize convexity. The fund charges 50 bps in fees.
Advocate Rising Rate Hedge ETF
The actively managed Advocate Rising Rate Hedge ETF is a multi-asset ETF that seeks to generate capital appreciation during periods of rising long-term interest rates, specifically interest rates with maturities of five years or longer.
The fund looks to achieve its investment objective primarily by investing in a combination of: U.S. Treasury securities; forwards, futures or options on various currencies; long and short positions on the short and long-end of the Treasury or swap yield curve via futures, swaps, forwards and other over-the-counter derivatives; long and short positions on equity indexes and/or investment companies, including ETFs; and commodity futures and options. The fund charges 85 bps in fees.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA - Free Report)
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.
This ETF is active and does not track a benchmark. The Virtus InfraCap U.S. Preferred Stock ETF seeks current income and, secondarily, capital appreciation through a portfolio of over 100 preferred securities issued by U.S. companies with market capitalization of over $100 million. The fund charges 1.21% and yields 8.79% annually.
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75-Bp Rate Hike in September? ETFs to Play
New York Fed President John Williams recently said he expects interest rates to continue higher and to remain at those levels until inflation is controlled, as quoted on CNBC. Fed chief Powell too recently commented that taming U.S. inflation will cause "pain" for American families and businesses as rate hikes will continue.
As rising rate worries have been prevalent with the Fed hiking rates faster and fatter this year, both the bond and stock investing are at worse. The Federal Reserve raised the target range for the fed funds rate by 75bps to 2.25%-2.5% during its July 2022 meeting, marking the fourth consecutive rate hike.
Per CME group, there is 70.5% probabilities of a 75-bp rate hike in the September meeting while 29.5% probability is of a 50-bp rate hike. Against this backdrop, below we highlight a few ETFs that could gain amid rising rate environment.
iShares Floating Rate Bond ETF (FLOT - Free Report)
This ETF offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared with traditional bonds. As such, unlike fixed coupon bonds, these will not lose value when the rates go up. Hence, it protects investors from capital erosion in a rising rate environment. The fund charges 15 bps in fees.
iShares Interest Rate Hedged High Yield Bond ETF (HYGH)
The underlying BlackRock Interest Rate Hedged High Yield Bond Index mitigates the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. It charges 52 bps in fees and yields 4.61% annually.
Simplify Interest Rate Hedge ETF (PFIX - Free Report)
This ETF is active and does not track a benchmark. The Simplify Interest Rate Hedge ETF seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.
The fund’s strategy includes initial investment of 50% of NAV in 7-year OTC payer swaption on the 20-year rate struck at 4.25%, providing direct exposure to rising rates. Option position is a strategic exposure to interest rates, expected to be reset only after extended periods of time or extreme rate moves. Option term and rate maturity are chosen to minimize cost of ownership; option strike and term chosen to maximize convexity. The fund charges 50 bps in fees.
Advocate Rising Rate Hedge ETF
The actively managed Advocate Rising Rate Hedge ETF is a multi-asset ETF that seeks to generate capital appreciation during periods of rising long-term interest rates, specifically interest rates with maturities of five years or longer.
The fund looks to achieve its investment objective primarily by investing in a combination of: U.S. Treasury securities; forwards, futures or options on various currencies; long and short positions on the short and long-end of the Treasury or swap yield curve via futures, swaps, forwards and other over-the-counter derivatives; long and short positions on equity indexes and/or investment companies, including ETFs; and commodity futures and options. The fund charges 85 bps in fees.
Virtus InfraCap U.S. Preferred Stock ETF (PFFA - Free Report)
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.
This ETF is active and does not track a benchmark. The Virtus InfraCap U.S. Preferred Stock ETF seeks current income and, secondarily, capital appreciation through a portfolio of over 100 preferred securities issued by U.S. companies with market capitalization of over $100 million. The fund charges 1.21% and yields 8.79% annually.