(New York)
We have been running a lot of stories lately about the best investments for a rising rate environment. The reasons are obvious. However, instead of pointing out ETFs for allocation etc, we found a good piece interviewing money managers about how they are handling their portfolios. Some of those interviewed are relying on short-term bonds to minimize their rate risk. Since the yield curve is quite flat, you get almost no extra compensation for the rate risk of holding longer maturity bonds. One manager highlighted that bonds in the 2-5 year window were a sweet spot. Some also said the market is over-discounting inflation and that inflation linked assets were a good idea.
FINSUM: Short-term bonds seem a like good play, but we have also been impressed with the interest rate hedged ETFs out there, which often go long corporate bonds and short Treasuries to offset any losses. They seem to have performed well.
(New York)
With rates rising and yields finally responding in a big way, you may have been wondering which ETFs tend to perform well in such periods. With that in mind, here is a list of the best performing ETFs in periods of rising rates (since 2008). The stats are from thirty day periods of rising rates, which have occurred 18 times since 2008. The best four are: VanEck Vector Oil Services ETF (6.53% average gain), the SPDR S&P Regional Banking ETF (4.9%), the United States Oil Fund ETF (4.54%), and the SPDR S&P Oil & Gas Exploration & Production ETF (3%).
FINSUM: Oil and banking, not really a surprise, but certainly a good reminder for investors. The worst performing funds in the same period tended to be gold funds.
(New York)
If rising rates weren’t scaring you a week ago, they surely are now, as the weight of rate rises has finally hit markets in a big way. With that said, here are some ETFs to help offset or benefit from rate hikes. Vanguard’s Short-Term Bond ETF (BSV) is a good bet, with an expense ratio of just 0.07% and a yield of about 3%. Another interesting one is the Invesco Senior Loan ETF (BKLN). The loans underlying this fund have their yields reset every 30 to 90 days, so your payout keeps rising with the market. The fund yields 4.19% and costs 0.65%. Lastly, take a look at the Fidelity’s Dividend ETF for Rising Rates (FDRR), which focuses on dividend growth stocks, a group that has historically performed well during periods of rising rates.
FINSUM: This a nice group of options, all of which are quite different from each other.
(New York)
Many are worried the bond market turmoil will grow worse. Bonds sold off fiercely last week, and the US jobs report, while not as great as expected, still reinforced the fact that rates are headed higher as the economy strengthens. However, many economists and analysts think the rise in yields will abate or even reverse in the coming weeks. Yields are at 3.23% on the ten-year Treasury now, but the average forecast of 58 economists surveyed says they will end the year at 3.08%. Even the worst bond market bears, like Goldman Sachs, think yields will only rise gradually to finish the year at 3.4%.
FINSUM: Our personal view is that yields had their big move upward and will probably now trade in a band at least until the next Fed meeting.
(New York)
Fighting the impact of rising rates on one’s portfolio is likely a primary goal of many advisors and investors right now, so we will be running a series of stories on the topic. For instance, Goldman Sachs has just released a new ETF in the area. In what is being called “smart beta exposure to bond markets”, Goldman has launched the Goldman Sachs Access Inflation Protected US Bond ETF (GTIP). The fund selectively chooses Treasury Inflation Protected Securities and costs 0.12% per year. “TIPS present an attractive diversification opportunity for many investors with relatively low correlations to other major asset classes”, says Goldman.
FINSUM: TIPS seem like a good investment right now, but we wonder how this will perform versus other rate hedged ETFs, most of which seem to have a different angle.. On the plus side, it is quite low cost.
(New York)
There has been a lot of speculation about rising rates and whether the Fed might increase the pace of its hikes. However, until yesterday, that fear had not really exhibited itself in yields. Now everything is changed. Accordingly, Barron’s has run a piece highlighting two funds to help protect your portfolio from rising rates. One is the Loomis Sayles Bond fund (LSBRX) and the other is the Oakmark Equity & Income Fund (OAKBX). The former takes an all-bond approach to offset rate rises by loading up on shorter maturities. The Oakmark fund usually holds around 60% equities, with a mix of bonds making up the rest.
FINSUM: These are interesting choices. Whether to buy passive or active funds to offset rate hikes right now has to be the advisor’s choice. ETFs and mutual funds can both be good options depending on the approach one wants to take.
(New York)
The big global selloff in sovereign bonds, which included US treasury bonds, has spilled over into the corporate bond sector in a big way. One of the biggest ETFs tracking US corporate bonds fell to 2013 lows today. “The jump in rates is inevitably detrimental to long-duration credit performance, with LQD a classic example”, said an analyst, citing BlackRock’s popular LQD corporate bond ETF. While corporate earnings look healthy, the big issue is that investment grade bonds tend to have higher durations than high yield, which means they suffer more when rates rise.
FINSUM: We wonder how much this jump in yields might start to really affect the giant mass of BBB bonds. This kind of move in yields could prove a tipping point.
(New York)
Have you heard of the new “doom loop”? The term may seem vaguely familiar, and follows in a long line of sensationalist financial terms. Just like in its origin during the European debt crisis, the term once again refers to a European state sinking under the crushing weight of its own debt. You guessed it, Italy. The doom loop refers to the European bank habit of loading up on sovereign bonds, and in turn creating a negative reinforcment cycle where bonds fall in value, which leads to serious concerns over a bank meltdown, which then exacerbate the original economic fears. That is exactly what is now occurring after Italian bonds sold off steeply following the country’s wild budget approval.
FINSUM: Italy is one of the very largest debt markets and economies in the world, and a full scale meltdown there would surely impact global markets, even the Teflon-coated US stock market.
(New York)
Rates are rising, and with it, investors need to take a closer look at their portfolios. Rising rates can have serious effects on some dividend-focused sectors, such as utilities, REITs, or consumer discretionary, and most bonds. With that in mind, here is an ETF to help combat rising rates. One fixed income ETF built for the current rate environment is the iShares Interest Rate Hedged Corp Bd ETF (LQDH). What makes this ETF special versus others is that it is actively managed and has longer-term fixed income exposures, which stands in sharp contrast to the mostly short-term bonds these funds typically hold. It holds a 3.62% yield and charges 0.24% per year.
FINSUM: That seems a good expense ratio and yield given that this is an actively managed fund. Interest rate hedged ETFs seem like a good idea right now given the strong economy and increasingly hawkish Fed.
(New York)
Rates are rising and new statements out of the Fed make it seem like the central bank could become more aggressive with its hike. With that in mind, the Wall Street Journal thinks it is time to adjust portfolios to account for a hawkish Fed. The biggest recommendation that the WSJ makes is that investors in retirement should keep a healthy allocation to stocks. Even though rates are rising, yields may not get high enough quickly enough to provide good returns. Accordingly, keeping a solid portion of capital in equity seems smart, but don’t swing for the fences. Next, make sure to stay very diversified to mitigate risks, and particularly, beware rate sensitive sectors like utilities or REITs.
FINSUM: This is sound advice, though nothing that would not be second nature for an advisor.
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(New York)
Treasury yields stayed pinned for most of this year. For many months it seemed like they were stuck in the ~2.85% range. This raised some hopes that we might have reached the crest in this hiking and rate rise cycle. However, Treasury yields have jumped considerably higher lately, and are now sitting close to their seven-year high of 3.11% from May. Yields have been moving higher as the trouble in emerging markets and Italy has waned, making investors turn to more pro-risk investments.
FINSUM: Yields are going to move in line with macroeconomic movements, especially right now. If the trade war worsens, or starts to show signs of hurting EM economies, expect a big retreat in yields.
(New York)
The whole market is generally afraid of rising rates. Both in 2015 and 2018, there were significant mini-meltdowns about the prospect of aggressive rate rises. One of the aspects that most worries investors is that higher rates will drive participants out of stocks and into higher-yielding bonds. However, while true in some respects, that narrative is far too simple. Higher rates are a symptom of a healthy and growing economy, which means the business fundamentals driving stocks are getting better, a factor which is likely far more important than incremental changes in rates.
FINSUM: We think there is some wisdom in these words, especially as they perfectly encapsulate what has happened with the market this year.
(New York)
There has been a lot of focus in the media lately about rising rates and what they will mean for investor portfolios. The ten-year yield is now well over 3% again, and the Fed looks likely to hike twice more before the end of the year. If your fixed income exposure (and equity exposure) isn’t carefully hedge, it could spell losses. Accordingly, here are three ETFs to help offset rate risk: the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN), the iShares Floating Rate Bond ETF (FLOT), and the ProShares High Yield—Interest Rate Hdgd (HYHG). The first two rely on floating rate bonds of short maturities, while the ProShares fund goes long corporate bonds and short Treasuries.
FINSUM: The performance of these kind of hedged ETFs has been good since rates started rising a couple years ago. They seem to have an important role to play in portfolios right now.
(New York)
Rising rates are definitively upon us. The Fed is poised to hike very soon and is likely to do so again before the end of the year. Some popular sectors, especially those with good dividends—REITs, utilities, telecoms—can suffer badly in rising rate periods. Luckily there are several ETFs that can help advisors hedge their exposure. The most common rate hedged ETFs are bond-based and use a strategy of buying higher-yielding corporate bonds and hedging their rate risk by short-selling Treasuries. The strategy seems to work well. For instance, the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) gained about 11% between the 10-year Treasury’s low in July 2016 to now, while its unhedged cousin, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) lost 0.45%.
FINSUM: That is quite a margin between the two funds, which is a testament to how well the strategy performs in rising rate periods. There are several similar funds out there, and they seem like a good idea right now.