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Fed Rhetoric Turns Hawkish: ETF Strategies to Play Rising Yields
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Federal Reserve Chair Jerome Powell's recent remarks indicate a delay in rate cuts. Fed chair Jerome Powell highlighted the persistent challenge of inflation, indicating that it will take longer than anticipated to bring inflation down to the Fed's 2% target.
Powell pointed out that recent economic data, especially from the first quarter, have not shown the necessary progress toward easing inflation, which remains higher than desired. Powell stressed on the need for a restrictive monetary policy to shore up the economy.
Gwinn, the head of US rates strategy at RBC Capital Markets, has scaled back expectations from three cuts to just one in December, as quoted on Yahoo Finance. Fed officials are now seeing the latest inflation surge as non-temporary. This change in Fed rhetoric indicates a departure from previous narratives that were centered on imminent policy easing.
Will December See First Rate Cut?
Current projections now suggest a rate cut might not occur until September at the earliest. Gwinn points out that recent rate hikes haven't produced expected results, partly due to pandemic-related factors and ongoing fiscal support. Hence, the Fed might take a little longer to enact the first rate cut.
The timing of rate cuts, particularly in November, is seen as politically sensitive due to election fervor. Gwinn predicts a restrained rise in bond yields. Extreme highs are not expected. Factors including reduced Treasury supply and improved deficit expectations are likely to result in a more stable bond market outlook.
ETF Strategies to Play
Given this, investors must be interested in finding out all possible strategies to weather a rise in interest rates. For them, below we highlight 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 ETFSEIX, which yields about 9.10% annually and Invesco Senior Loan ETF (BKLN - Free Report) , which yields 8.78% annually are good picks here.
Play Floating Rate Bond ETFs
The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and 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, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 5.83% annually) and iShares Treasury Floating Rate Bond ETF (TFLO - Free Report) (yields 5.25% annually) are two examples in this category.
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 rates higher for longer and short-term bond yields may stay high. That would result in a similar rate for cash-like assets such as money-market funds.
Investing options include JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 5.08% annually), Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) (yields 8.26% annually), and Fidelity Low Duration Bond Factor ETF (FLDR - Free Report) (yields 5.48% 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 ETFPFIX, Global X Interest Rate Hedge ETF (RATE - Free Report) and Foliobeyond Rising Rates ETFRISR.
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) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment.
Short U.S. Treasuries
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) .
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Fed Rhetoric Turns Hawkish: ETF Strategies to Play Rising Yields
Federal Reserve Chair Jerome Powell's recent remarks indicate a delay in rate cuts. Fed chair Jerome Powell highlighted the persistent challenge of inflation, indicating that it will take longer than anticipated to bring inflation down to the Fed's 2% target.
Powell pointed out that recent economic data, especially from the first quarter, have not shown the necessary progress toward easing inflation, which remains higher than desired. Powell stressed on the need for a restrictive monetary policy to shore up the economy.
Gwinn, the head of US rates strategy at RBC Capital Markets, has scaled back expectations from three cuts to just one in December, as quoted on Yahoo Finance. Fed officials are now seeing the latest inflation surge as non-temporary. This change in Fed rhetoric indicates a departure from previous narratives that were centered on imminent policy easing.
Will December See First Rate Cut?
Current projections now suggest a rate cut might not occur until September at the earliest. Gwinn points out that recent rate hikes haven't produced expected results, partly due to pandemic-related factors and ongoing fiscal support. Hence, the Fed might take a little longer to enact the first rate cut.
The timing of rate cuts, particularly in November, is seen as politically sensitive due to election fervor. Gwinn predicts a restrained rise in bond yields. Extreme highs are not expected. Factors including reduced Treasury supply and improved deficit expectations are likely to result in a more stable bond market outlook.
ETF Strategies to Play
Given this, investors must be interested in finding out all possible strategies to weather a rise in interest rates. For them, below we highlight 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, which yields about 9.10% annually and Invesco Senior Loan ETF (BKLN - Free Report) , which yields 8.78% annually are good picks here.
Play Floating Rate Bond ETFs
The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and 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, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 5.83% annually) and iShares Treasury Floating Rate Bond ETF (TFLO - Free Report) (yields 5.25% annually) are two examples in this category.
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 rates higher for longer and short-term bond yields may stay high. That would result in a similar rate for cash-like assets such as money-market funds.
Investing options include JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 5.08% annually), Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) (yields 8.26% annually), and Fidelity Low Duration Bond Factor ETF (FLDR - Free Report) (yields 5.48% 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) and Foliobeyond Rising Rates ETF RISR.
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) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment.
Short U.S. Treasuries
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) .