With the markets largely expecting the Federal Reserve to hike benchmark interest rates next year, it is never too early to start thinking about exchange traded fund options that can help mitigate the negative effects of rising rates.
Traders are boosting U.S. short-term interest-rate futures contracts, revealing about a 55% chance the first Fed rate hike could occur in June 2015, up from a 52% chance before the Thursday employment report, Reuters reports.
Meanwhile, BlackRock argues that the Fed could even raise rates by the first quarter after the stronger-than-expected jobs growth.
“The Fed will move faster than people think because the data is extraordinarily compelling,” Rick Rieder, chief investment officer for fundamental fixed income at BlackRock, said in a Bloomberg article. “If the data continues along the runway that it’s at, there’s no reason why it can’t move faster.”
Accordingly, investors can utilize a range of fixed-income ETF options to mitigate the negative effects of rising rates, as witnessed last year.
For starters, investors can go down the yield curve with short-duration bond ETFs. The iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) has a 1.92 year duration, Schwab Short-Term U.S. Treasury ETF (NYSEArca: SCHO) has a 1.97 year duration and Vanguard Short-Term Government Bond ETF (NYSEArca: VGSH) has a 1.9 year duration. Duration is a measure of a bond fund’s sensitivity to changes in the interest rates, so a 1% increase in interest rates could translate to about a 1.9% decline in each of these short-term ETFs. [Short-Term Debt ETFs Weakening Ahead of Rising Rate Expectations]