Some fixed-income investors are looking at bond ETFs with shorter durations for cover if interest rates rise further. Bank loan ETFs also provide a cushion against higher rates.
“Bonds with longer durations — meaning they mature at a later date — tend to be more sensitive to interest-rate changes, making them more volatile in price than bonds with shorter durations,” writes Erin Arvedlund, a columnist for the Philadelphia Inquirer.
For rate protection, she points to short-duration bond ETFs such as Vanguard Short-Term Bond (NYSEArca: BSV), Guggenheim Enhanced Short Duration Bond (NYSEArca: GSY) and PIMCO Enhanced Short Maturity (NYSEArca: MINT). [Ultra-Short-Duration Bond ETFs as a Cash Alternative]
These short-term bond ETFs have also been in the spotlight with money market mutual funds facing SEC reform measures. [Money Market Debate Puts Focus on Short-Duration ETFs]
However, Arvedlund points out that ETFs have fluctuating share prices, unlike money funds. [Investors Flock to Low-Duration ETFs for Rising Rate Protection]
“When comparing exchange-traded funds, look carefully at the management fees, whether there are any fee caps or waivers (which sometimes allow the fund company to charge the fee at a later date and recoup the money), what kind of dividend income it provides you, and any tax implications if you trade in and out of these ETFs frequently,” she writes. [Investors Buying High-Yield ETFs with Shorter Durations]
“If you want to avoid rising rates altogether, check out bank-loan funds. Investors fearful of rising rates are turning to the PowerShares Senior Loan ETF (NYSEArca: BKLN). Senior loans are high-yield bonds with floating rates, which removes interest-rate risk altogether,” the columnist added. [Bank Loan ETFs: Active or Passive?]
Full disclosure: Tom Lydon’s clients own BSV.