Five ETFs to Protect Against Rising Interest Rates

October 13th at 6:09am by Tom Lydon

After the multi-decade long rally in the Treasuries market, yields are now hovering around historic low rates. If you are wary of a potential rising rate environment, short duration and inverse Treasury exchange traded funds could help mitigate the risks in a fixed-income portfolio.

“With interest rates at all-time lows, potential upside in any new fixed income positions is limited. In fact, the risk-return profile for fixed income may be at an extreme. Given the prospect for higher future rates, now may be a good time to consider potential hedges against rising rates,” says ETF manager Invesco PowerShares.

When looking at the spectrum of available Treasury bonds, investors may choose from short duration to long duration securities. Since there is a greater possibility that interest rates will rise over the long term, long-term bonds may suffer a discounted market price when sold. Essentially, longer-term bonds are riskier because there is a higher chance the value will fluctuate with interest rate cycles.

Accordingly, investors who still want exposure to Treasury bonds may look at short-term Treasury ETFs, instead:

  • iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY): 1.85 year duration
  • Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO):  1.92 year duration
  • Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH):  1.92 year duration

The three Treasury bond ETFs track investment-grade U.S. government bonds with an average maturity of 1 to 3 years.

Still, if you want to aggressively hedge against rising rates, inverse long-term Treasury bond ETF options are also available:

  • ProShares UltraShort 20+ Year Treasury ETF (NYSEArca: TBT) seeks to provide twice, or 200%, the inverse daily performance of Treasuries with maturities greater than 20 years.
  • Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEArca: TMV) tries to reflect the daily 300% inverse performance of the NYSE 20 Year Plus Treasury Bond Index, which holds long-term 20 year and greater maturity range of U.S. Treasuries.

Leveraged and inverse ETFs are meant as short-term hedging tools. The funds rebalance on a daily basis and long-term performance may not perfectly reflect the underlying holdings due to compounding issues.

For more information on the Treasuries market, visit our Treasury bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.