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9 Winning ETF Ways for Those Who Fears Rising Yields
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As widely expected, the Fed raised benchmark interest rates by a modest 25 bps to the 0.50–0.75% band. The Fed expressed its confidence in the U.S. economy and forecast three rate hikesin 2017, up from two guided in September.
Alongside, the U.S. central bank upped the median projection for real GDP growth and lowered the same for unemployment in 2016, 2017 and 2019. Projections for the benchmark interest rates for the next three years were also beefed up.
Though the future policy of the Fed is still hazy with Trump’s impending policy framework and still-subdued business spending, Treasury yields were on an uphill ride. The two-year benchmark Treasury yield jumped 10 bps from the day earlier to 1.27% on December 14, marking a seven-yearhigh. The yield on the 10-year Treasury note rose 6 bps to 2.54%. Most regular bond ETFs were in the red on December 14.
Against such a backdrop, investors might be looking for ways to save their portfolio from the ills of rising rates. For them, we highlight some ETF choices that might be used for gains if the Fed speeds up hikes next year.
WisdomTree Barclays US Aggregate Bond Zero Duration ETF (AGZD - Free Report)
The fund employs a long position in bonds representing the Barclays US Aggregate Bond Index and a short position in Treasury securities to target zero duration. This zero duration strategy makes you steer clear of rising rate risks.
Highland/iBoxx Senior Loan ETF
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, these give protection to investors in any event of liquidation. As a result, default risk is low for such bonds, even after belonging to the junk bond space (read: Worried About Higher Interest Rates? Buy These Four ETFs to Profit).
Moreover, senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better in the first half of 2017. SNLN couldthus be a good pick for upcoming plays. Ityields around 4.41% annually.
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 issuers.
Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. FLOT has an effective duration of 0.15 years and thus presents minimal interest rate risks (see all Investment Grade Corporate Bond ETFs here).
Preferred stocks are hybrid securities having characteristics of both debt and equity. Preferred stocks pay holders a fixed dividend, like bonds. These types of shares normally get priority over equity shares both in case of dividend payments as well as at the time of liquidation if the company fails. Preferred stocks are thus relatively stable and usually exhibit a low correlation with other income generating assets.
These products are interest rate sensitive – lesser than the bond space though – but a high yield opportunity might present them as potential bets once the Fed expedites more hikes. PFF which yields around 6.17% annually may well guard your portfolio even if there is a capital loss.
Business Development Companies (BDCs) are firms that give loan to small and mid-sized companies at relatively higher rates and often grab debt or equity stakes in them (read: BDC ETFs Under the Microscope).
BDCs dole out high cash payments and reflect the equity performance of the borrower. The U.S. law obliges BDCs to hand out more than 90% of their annual taxable income to shareholders. BIZD yields even higher at around 8.59% and is thus a decent pick.
Emerging Markets Bond - Interest Rate Hedged ETF
Though emerging market (EM) equities fell post Fed rate hike, investors should note that emerging markets are better positioned this time around than these were in 2013. In fact, several emerging markets’ debt-to-GDP ratios remain below that of developed markets, making EM bond ETFs better bets right now.
Within the pack, investors can especially look at EMIHwhich provides exposure to emerging-market debt from 29 countries while lowering the interest rate risk of the portfolio (read: 5 Reasons to Invest in Emerging Market Bond ETFs).
Financial stocks perform better in a rising rate environment. And nothing could be better than coupling high dividend nature with a financial ETF. Investors should note that KBWD yields about 8.2% annually (read: 4 High Dividend ETFs Under $20).
Barclays Inverse US Treasury Aggregate ETN
As yields surged, inverse bond exchange-traded products like TAPR should soar. The product was up about 0.7% on the day.
Image: Bigstock
9 Winning ETF Ways for Those Who Fears Rising Yields
As widely expected, the Fed raised benchmark interest rates by a modest 25 bps to the 0.50–0.75% band. The Fed expressed its confidence in the U.S. economy and forecast three rate hikesin 2017, up from two guided in September.
Alongside, the U.S. central bank upped the median projection for real GDP growth and lowered the same for unemployment in 2016, 2017 and 2019. Projections for the benchmark interest rates for the next three years were also beefed up.
Though the future policy of the Fed is still hazy with Trump’s impending policy framework and still-subdued business spending, Treasury yields were on an uphill ride. The two-year benchmark Treasury yield jumped 10 bps from the day earlier to 1.27% on December 14, marking a seven-yearhigh. The yield on the 10-year Treasury note rose 6 bps to 2.54%. Most regular bond ETFs were in the red on December 14.
Against such a backdrop, investors might be looking for ways to save their portfolio from the ills of rising rates. For them, we highlight some ETF choices that might be used for gains if the Fed speeds up hikes next year.
WisdomTree Barclays US Aggregate Bond Zero Duration ETF (AGZD - Free Report)
The fund employs a long position in bonds representing the Barclays US Aggregate Bond Index and a short position in Treasury securities to target zero duration. This zero duration strategy makes you steer clear of rising rate risks.
Highland/iBoxx Senior Loan ETF
Senior loans are issued by companies with below investment grade credit ratings. In order to make up for this high risk, senior loans normally have higher yields. Since these securities are senior to other forms of debt or equity, these give protection to investors in any event of liquidation. As a result, default risk is low for such bonds, even after belonging to the junk bond space (read: Worried About Higher Interest Rates? Buy These Four ETFs to Profit).
Moreover, senior loans are floating rate instruments and provide protection from rising interest rates. In a nutshell, a relatively high-yield opportunity coupled with protection from the looming rise in interest rates should help the fund to perform better in the first half of 2017. SNLN couldthus be a good pick for upcoming plays. Ityields around 4.41% annually.
iShares Floating Rate Bond ETF (FLOT - Free Report)
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 issuers.
Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. FLOT has an effective duration of 0.15 years and thus presents minimal interest rate risks (see all Investment Grade Corporate Bond ETFs here).
iShares S&P U.S. Preferred Stock ETF ((PFF - Free Report) )
Preferred stocks are hybrid securities having characteristics of both debt and equity. Preferred stocks pay holders a fixed dividend, like bonds.
These types of shares normally get priority over equity shares both in case of dividend payments as well as at the time of liquidation if the company fails. Preferred stocks are thus relatively stable and usually exhibit a low correlation with other income generating assets.
These products are interest rate sensitive – lesser than the bond space though – but a high yield opportunity might present them as potential bets once the Fed expedites more hikes. PFF which yields around 6.17% annually may well guard your portfolio even if there is a capital loss.
Market Vectors BDC Income ETF ((BIZD - Free Report) )
Business Development Companies (BDCs) are firms that give loan to small and mid-sized companies at relatively higher rates and often grab debt or equity stakes in them (read: BDC ETFs Under the Microscope).
BDCs dole out high cash payments and reflect the equity performance of the borrower. The U.S. law obliges BDCs to hand out more than 90% of their annual taxable income to shareholders. BIZD yields even higher at around 8.59% and is thus a decent pick.
Emerging Markets Bond - Interest Rate Hedged ETF
Though emerging market (EM) equities fell post Fed rate hike, investors should note that emerging markets are better positioned this time around than these were in 2013. In fact, several emerging markets’ debt-to-GDP ratios remain below that of developed markets, making EM bond ETFs better bets right now.
Within the pack, investors can especially look at EMIHwhich provides exposure to emerging-market debt from 29 countries while lowering the interest rate risk of the portfolio (read: 5 Reasons to Invest in Emerging Market Bond ETFs).
PowerShares KBW High Dividend Yield Financial ETF (KBWD - Free Report)
Financial stocks perform better in a rising rate environment. And nothing could be better than coupling high dividend nature with a financial ETF. Investors should note that KBWD yields about 8.2% annually (read: 4 High Dividend ETFs Under $20).
Barclays Inverse US Treasury Aggregate ETN
As yields surged, inverse bond exchange-traded products like TAPR should soar. The product was up about 0.7% on the day.
S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV - Free Report)
Since a market rally can bring about a correction in the market in the near term, a low volatile but still an ex-rate sensitive pick deserves a look.
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