Two factors – the Artificial Intelligence Craze and the Federal Reserve – have been pulling the strings of Wall Street for the past year. This week has also not been an exception. The key AI and chip player NVIDIA (NVDA Quick QuoteNVDA - Free Report) reported its earnings on Wednesday after the market closed and expectedly boosted AI optimism in the market, but only for a short while.

This happened because the second driver – Fed minutes – came into play and did not allow Wall Street to remain enthusiastic for long. Stocks slipped from record levels on Thursday as interest rate worries dominated investor sentiment (read: AI & Fed Driving Stock Market? ETFs to Bet On).

Investors should note that the Federal Reserve’s latest minutes indicate worries over the lack of progress on inflation. The minutes also showed that various participants showed a willingness to tighten policy further to handle sticky inflation. The meeting also showed that inflation was more stubborn than officials had expected to start 2024.

Goldman Sachs CEO David Solomon expressed his belief that the Federal Reserve will not cut interest rates this year, contrary to market expectations. He emphasized the persistence of inflation and the need for caution before adjusting rates, as quoted on Reuters.

Economic data released on Thursday strengthened the narrative. The S&P Global Purchasing Managers Index (PMI) for May came in at 54.4 versus 51.3 last month. The flash reading, which came in above economists’ expectations, showed that business activity accelerated at the fastest pace in two years despite the Fed's efforts to quell price pressures.

The benchmark US treasury yield jumped to 4.47% on May 23, 2024, versus 4.44% recorded on May 20 and the weekly low of 4.41% recorded on May 20.

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 9.05% annually and Invesco Senior Loan ETF (BKLN Quick QuoteBKLN - Free Report) , which yields 8.82% annually are good picks here.

Play Floating Rate Bond ETFs

The floating rate bond has been an area to watch lately in a 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, they are less sensitive to an increase in rates compared to 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 Quick QuoteFLOT - Free Report) (yields 5.86% annually) and iShares Treasury Floating Rate Bond ETF TFLO (yields 5.27% annually) are two examples in this category.

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 Quick QuoteRATE - Free Report) and Foliobeyond Rising Rates ETF RISR. One ETF, JPMorgan Equity Premium Income ETF JEPI, can also be an intriguing pick due to its high annual yield of 7.28%.

Go Short With Rate-Sensitive Sectors

Needless to say, sectors that perform well in a low-interest rate environment and offer higher yields 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 Quick QuoteSRS - Free Report) , ProShares Short Real Estate (REK Quick QuoteREK - Free Report) and ProShares UltraShort Utilities (SDP Quick QuoteSDP - Free Report) are such inverse ETFs that could be winning bets in a rising rate environment.

Short U.S. Treasuries

Plus, shorting U.S. treasuries is also a great option in this type of volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF (TBT Quick QuoteTBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV Quick QuoteTMV - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST Quick QuotePST - Free Report) .

Consumer ETFs to Suffer?

Goldman’s Solomon highlighted the varying impacts of inflation on different segments of society, noting changes in consumer behavior, such as reducing purchase sizes in response to rising prices. Investors need to closely watch the movement of SPDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report) and Consumer Staples Select Sector SPDR ETF (XLP Quick QuoteXLP - Free Report) .

Time to Buy Hedged-Eurozone ETFs?

Solomon also predicted interest rate cuts in Europe due to economic sluggishness. Additionally, some of the Eurozone economies have turned around lately. The Eurozone's biggest economy, Germany, which has so far been ailing, has shown signs of improvement. The corporate earnings backdrop has been brightening along with cheaper valuations. All these make iShares Currency Hedged MSCI Eurozone ETF HEZU a decent bet currently. The fund yields 2.24% annually (read: 5 Reasons to Bet on Eurozone ETFs Now).