Back to top

Image: Bigstock

ETF Strategies to Fight Rising Rates

Read MoreHide Full Article

Wall Street has been upbeat in the first half of 2023 despite a few occasional hiccups, mainly due to a less-hawkish Fed, better-than-expected corporate earnings and the AI mania. However, Wall Street’s run in the second half of the year hasn’t been smooth so far as rates have been rising.

The U.S. Treasury yields have been on a surge lately, driven by expectations that the Fed will keep interest rates higher for longer to fight inflation. At the July meeting, the majority of Fed members observed 'significant upside risks' to inflation (read: More Rate Hikes in Cards On Sticky Inflation? ETFs to Buy).

As of Aug 18, 2023, the benchmark U.S. treasury yield stood at 4.30%, up from 4.05% recorded at the start of the month. Given this, investors must be interested in finding out all possible strategies to weather a sudden jump in the benchmark interest rates. For them, below we highlighted a few investing tricks that could gift investors with gains in a rising rate environment.

Tap Senior Loan ETFs

Senior loans are floating rate instruments thus providing protection from rising interest rates.  This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically which help in eliminating interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space.

Virtus Seix Senior Loan ETF (SEIX - Free Report) , which yields about 7.59% annually andHighland/IBoxx Senior Loan ETF , which yields 7.49% annually are good picks here.

Still Want Bond Exposure? Look at These 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. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds.

Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context. The fund yields 4.74% annually.

Plus, shorting U.S. treasuries is also a great option in this type of a volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST - Free Report) (read: Bets on Higher Rates Trigger Rally in Inverse Treasury ETFs).

Time for Cash-Like ETFs?

We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed may keep on hiking rates this year and short-term bond yields will rise alongside. That would result in a similar rate for cash-like assets such as money-market funds. As of Aug 18, yield on three-year U.S. treasury note was 5.56%.

Investing options include JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 3.72% annually), Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) (yields 6.44% annually), and iShares IBonds 2023 Term High Yield And Income ETF IBHC (yields 3.87% annually). Such short-term bond ETFs also have lower interest rate sensitivity.

Hedge Rising Rates With Niche ETFs

There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF PFIX, Global X Interest Rate Hedge ETF (RATE - Free Report) , Foliobeyond Rising Rates ETF RISR and Advocate Rising Rate Hedge ETF RRH.

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 UltraShort Real Estate (SRS - Free Report) , 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.

Published in