Benchmark yields have remained stubbornly low, but we are looking a higher interest rates in the future. Consequently, bond exchange traded fund investors are taking a hard look at their fixed-income portfolio.
More investors are looking into income strategies for today’s markets, positioning portfolios to withstand rising interest rates. For the advisors who are interested in learning more about fixed-income ETFs strategies, ETF Trends and RIA Database are hosting the annual ETF Virtual Summit, an online conference experience, on January 21.
In a rising rate environment, older bonds with lower yields are less in demand. To attract demand, the price of pre-existing bonds would have to diminish enough to match the same return yielded by prevailing interest rates. Consequently, we typically see an inverse relationship between yields and a bond’s price where a rising rate environment would correspond with falling bond prices.
As a way to hedge the potential fallout in the fixed-income market ahead, investors are beginning to take a closer look at holdings and alternative investment options. Some have considered floating rate bonds and related ETFs to hedge rate risks.
For instance, the Market Vectors Investment Grade Floating Rate (NYSEArca: FLTR) tracks U.S. dollar-denominated floating rate notes issued by corporate issuers with an investment-grade rating. The floating rate notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate, so rising rates have a minimal effect on the securities. [Floating Rate ETFs for Rising Rates Protection]