7 ETFs for rising interest rates

Rising borrowing rates and costs aren’t bad for all ETFs. In early 2020, before the disruptions caused by the pandemic, …

Rising borrowing rates and costs aren’t bad for all ETFs.

By early 2020, before the disruption caused by the pandemic, interest rates on the all-important 10-year U.S. Treasury bill had risen slightly to 1.9%. But as the severity of COVID-19 became evident, the rates on this closely watched bond plunged to a 10-year low of less than 0.32%. As the global economy surpasses the pandemic, 10-year bond yields have returned above 1.6% – and many market watchers say they will go even higher in the coming months, with rates on everything from mortgages to credit cards to rising business loans in kind. If this happens, a rising rate environment can cause big disruptions in various asset classes. So how can you prepare your portfolio for this change? Here are seven potential options that might be right for you, depending on your financial goals.

Financial Select Sector SPDR Fund (symbol: XLF)

It makes sense to start with XLF, the largest exchange-traded fund in the financial industry with over $ 45 billion in assets. Major holdings include Warren Buffett’s investment giant, Berkshire Hathaway Inc. (BRK.A, BRK.B) and banking giant JPMorgan Chase & Co. (JPM), to name a few. The reason financial companies like these are a good game in a rising interest rate environment is that these companies tend to increase the rates they charge for loans they make to others. . And at the same time, many of these companies borrowed capital at a lower rate depending on market conditions in previous years. This creates a natural tailwind for all of these companies’ core financial activities – as evidenced by the fact that XLF has grown over 37% so far this year, compared to just 23% for the broader S&P 500 in the world. during the same period.

SPDR S&P Regional Bank ETF (KRE)

Slightly smaller bank ETF, this fund focuses only on regional US financial companies. Major holdings include stocks such as SVB Financial Group (SIVB) and KeyCorp (KEY) as opposed to the big dogs of XLF. The reason this can be an attractive alternative is that these types of institutions are almost exclusively involved in borrowing and lending activity, which is not always the case with big Wall Street titans like JPMorgan. This focus is working well, with KRE relying on 36% year-to-date to follow XLF. It’s also worth noting that while this regional banking ETF is a bit more focused, it remains very popular and liquid with some $ 5 billion in assets under management.

IShares Floating Rate Bond ETF (FLOT)

Beyond the equity markets, bond funds offer a multitude of alternatives for investing in an environment of rising interest rates. One of the most intuitive ETFs you can invest in right now is FLOT, a fund made up of bonds that adjust their rates upward in real time as interest rates rise. Consumer-focused loans such as variable rate mortgages or credit card plans can all see their rates rise in this type of environment, and FLOT allows you to hold a portfolio of variable rate bonds issued by leading companies such as Goldman Sachs Group Inc. (GS) and Verizon Communications Inc. (VZ) as well as institutions such as the European Investment Bank. Granted, the rolling yield of this ETF is currently only 0.5%, but as rates rise in the broader market, the bonds that make up this fund will start to generate higher returns over time. .

Fidelity Short Bond ETF (FLDR)

A more defensive way to navigate a rising interest rate environment is to rely on bonds with shorter durations, which is a measure of the time it would take an investor to recover their investment. initial and which is closely linked to the maturity date of the obligation. and is sensitive to interest rates. As interest rates rise, new bonds are naturally more attractive due to higher yields – and older bonds are “discounted” accordingly and lose value. Bonds that are closer to maturity carry less risk of rising interest rates. With a very short time horizon of its holdings, and with an average duration of less than a year in its current range of around 250 positions, FLDR does not have to worry as much about this trend as bonds often arrive. to ripen very quickly. . These are also low risk investments in leading companies or in the US Treasury market, which adds to the stability here. Granted, the return is not very high, only around 0.5%, but the purpose of FLDR is more of a solid core investment than a growth option. Moreover, an environment of rising rates could slightly increase this yield over time.

WisdomTree Interest Rate Hedged US Aggregate Bond Fund (AGZD)

As the name suggests, this WisdomTree ETF is hedged against any decline in the value of bonds as rates rise. It does this by betting against bonds via short positions in US Treasuries. But don’t think of it as one of those super aggressive reverse funds designed to rise when a certain asset class goes down. There’s definitely a risk here, but the lion’s share of the portfolio is invested in over 2,000 individual bonds, from top-rated corporate and government bonds to riskier junk bonds. Short positions are simply designed to facilitate the progression of this fund, which offers a diversified mix of bonds and a decent yield of around 1.8%, which is significantly higher than other funds on this list. It was also rock solid in 2021, down less than 1% over the year despite an admittedly volatile bond market.

Simplified Interest Rate Hedging ETF (PFIX)

Unlike AGZD, this tactical ETF from Simplify, a smaller asset store, holds a significant position in interest rate options with the aim of providing direct exposure to sharp increases in interest rates. The bad news, of course, is that when rates fall, PFIX can suffer a significant drop. Consider that after a rate hike earlier this year, the PFIX has actually fallen over 15% since May, as the interest rate environment has been choppy. Still, the fund is liquid and established with over $ 100 million in assets and could be a good bet if you think low interest rates are a thing of the past – and significant rate hikes are likely in the short run. term. Remember, this is a tactical position for aggressive and active traders, not buyers and holders.


The last option on this list is less about a direct game on rising rates and more about an investment strategy based on the root cause: inflation. The Federal Reserve typically raises benchmark interest rates specifically to contain rising prices, and while there is no direct correlation, it’s generally typical that any rise in interest rates is accompanied by inflationary pressures. So, in such an environment, Inflation-Protected Treasury Securities – or TIPS for short – might be worth a look. This special category of Treasury bonds has a core value compared to the widely watched consumer price index. This means that if and when consumer prices rise – and perhaps interest rates with them – the value of SCHP’s portfolio also increases.

ETF for rising interest rates:

– SPDR funds of the selected financial sector (XLF)

– SPDR S&P Regional Bank ETF (KRE)

– iShares Floating Rate Bond ETF (FLOT)

– Fidelity Short Term Bond ETF (FLDR)

– WisdomTree Interest Rate Hedged US Aggregate Bond Fund (AGZD)

– Simplify the interest rate hedging ETF (PFIX)


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7 ETFs for rising interest rates originally appeared on usnews.com

Update 10/27/21: This story was posted at an earlier date and has been updated with new information.

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