The Federal Reserve’s preferred inflation measure accelerated to a three-year high in April, heightening concerns among policymakers and investors that price pressures are becoming more entrenched across the economy, as quoted on Yahoo Finance.

The Personal Consumption Expenditures (PCE) Index rose 3.8% year over year in April, driven mainly by higher oil prices stemming from the Middle East conflict. The reading matched market expectations and marked an increase from 3.5% in March.

Core PCE, which excludes volatile food and energy costs and is closely watched by the Fed, climbed 3.3% year over year, up from 3.2% in March. The increase was also in line with expectations but represented the highest core inflation reading in two-and-a-half years.

Inflation May Not Have Peaked Yet

Economists warned that inflationary pressures could continue to build in the months ahead. Joe Brusuelas, chief economist for RSM, noted that the recent rise in core inflation — often viewed as the best indicator of long-term inflation trends — may prove difficult to reverse quickly and could keep inflation far above the Fed’s 2% target.

Fed Officials Grow Increasingly Concerned

New York Fed President and FOMC Vice Chair John Williams said Thursday that inflation is likely to remain elevated in the coming months, with headline inflation potentially nearing 4% and core inflation staying above 3%.

While Williams expects headline inflation to peak within the next few months, he maintained that current monetary policy is “in a good place” to address risks stemming from the conflict with Iran.

Goldman Sachs COO John Waldron echoed those concerns, calling inflation the biggest risk facing markets, as quoted on the same Yahoo Finance article.

Fed Signals Shift Toward a More Hawkish Stance

Most policymakers continue to support holding interest rates steady for now, though a growing number are unwilling to rule out additional rate hikes if inflation remains persistent.

Fed Governor Lisa Cook said that she is “prepared to raise rates” if inflation fails to moderate in a “timely manner.”

Fed Still Expects Inflation to Ease Later This Year

Despite growing concerns, some Fed officials still believe inflation pressures could moderate over time.

Fed Vice Chair Philip Jefferson said Wednesday evening that inflation should decline later this year as the effects of tariffs and energy-related shocks begin to fade. However, he acknowledged that risks to the inflation outlook remain skewed to the upside.

Bond Market Signals Higher Rate Risks

The bond market continues to reflect growing concerns over inflation and the possibility of tighter monetary policy.

The 2-year Treasury yield — often viewed as a key indicator of Fed policy expectations — has remained near 4% last week, roughly 25 basis points above the upper end of the Fed’s current target range of 3.5%-3.75%.

Investors are increasingly pricing in the possibility of another Fed rate hike later this year.

ETF Investing Strategies in Focus

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 Quick QuoteSEIX - Free Report) , which yields about 7.25% annually and Invesco Senior Loan ETF (BKLN Quick QuoteBKLN - Free Report) , which yields 6.62% 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 Quick QuoteFLOT - Free Report) (yields 4.59% annually) and iShares Treasury Floating Rate Bond ETF (TFLO Quick QuoteTFLO - Free Report) (yields 3.95% 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 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.

Investing options include JPMorgan UltraShort Income ETF (JPST Quick QuoteJPST - Free Report) (yields 4.29% annually), and Invesco Global Short Term High Yield Bond ETF (PGHY Quick QuotePGHY - Free Report) (yields 7.05% 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 Quick QuotePFIX - 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 Quick QuoteSRS - Free Report) , ProShares Short Real Estate (REK Quick QuoteREK - Free Report) and ProShares UltraShort Utilities (SDP) 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 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).