That said, investors should also recognize that an eventual hike in the Federal Funds rate will likely impact shorter duration funds. Accordingly, investors should also consider floating rate products, which should adjust to increasing short-term rates. These are accessible through funds such as the iShares Floating Rate Note Fund (FLOT).
2. Consider more tactical allocations and bond funds. In an environment with steadily declining interest rates, a “buy-and-hold” mentality worked. But in today’s more volatile interest rate environment, particularly with its upward bias, investors may benefit from a more flexible and opportunistic approach. This is especially true for investors looking to potentially increase income and reduce volatility.
One solution to consider along these lines is the BlackRock Strategic Income Opportunities Fund (SIO), which employs an adaptable investment approach across fixed income sectors without constraints on maturity, sector, quality or geography.
3. Overweight equities. To be sure, equity markets have also suffered recently and are generally more volatile than bonds. But I still prefer stocks over bonds in the long term, even for more income-oriented investors.
The main reason: valuation. Bonds still look expensive by almost any metric. In contrast, global equities appear reasonably priced. In addition, while investors will be taking on more risk by opting for equities over bonds, stocks can potentially provide a portfolio with some better long-term inflation protection.
Source: Bloomberg 6/25/13
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
The author is long FLOT.