Fed Chair Jerome Powell recently stated that most central bank officials anticipate raising interest rates by the end of 2023. While the Fed decided to maintain the target range at the June policy meeting, Powell's remarks point to the tightening of the policy again.
In its June meeting, individual FOMC members indicated their expectations for future rates. Median expectation for funds rates now stands at 5.6% funds rate by the end of 2023. This implies two more quarter-point hikes in the remaining meetings this year, creating a very hawkish pause. Three officials see rates rising closer to 6% (read:
4 ETF Winners After Fed's "Hawkish Pause").
Going forward, the next Fed meeting at the end of July means a lot to investors. About 80% chance of a rate hike in July is currently priced in. In its June meeting, FOMC members also revised their forecasts for future years. They now expect the fed funds rate to fall to 4.6% for 2024 and 3.4% for 2025 — both projections showing an increase from the March forecasts.
ETF Opportunities for a Rising Rate Environment
While rising interest rates are negative for the stock market, they also bring new investment opportunities. Here, we discuss those potential ETF winners.
iShares Floating Rate Bond ETF ( FLOT Quick Quote 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, the fund protects investors from capital erosion in a rising rate environment. FLOT charges 15 bps in fees and yields 4.02% annually.
iShares Interest Rate Hedged High Yield Bond ETF ( HYGH Quick Quote HYGH - Free Report)
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 51 bps in fees and yields 7.54% annually.
Simplify Interest Rate Hedge ETF ( PFIX Quick Quote 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 charges 50 bps in fees and yields 1.21% annually.
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 charges 85 bps in fees.
Vanguard High Dividend Yield ETF ( VYM Quick Quote VYM - Free Report)
High-dividend ETFs like VYM can offer higher current income that can make up for capital losses (if there is any) to some extent. The underlying FTSE High Dividend Yield Index consists of common stocks of companies that pay dividends generally higher than average. The fund charges 6 bps in fees and yields 3.98% annually.