As the Federal Reserve plans a “gradual” interest rate tightening cycle, exchange traded fund investors will have to adjust their portfolios accordingly.
On the upcoming webcast, Positioning Portfolios in a Rising Rate Environment, Joe Benevento, CIO for Americans and Co-Head of Global Fixed Income at Deutsche Asset Management, Sebastien Galy, FX Strategist at Deutsche Bank, Chuck Self, CIO and COO of iSectors LLC, and Jack Fowler, V.P of Global Client Group for Deutsche Asset Management, will discuss strategies to help position client portfolios as the Federal Reserve hikes interest rates, along with the potential pace of tightening to expect ahead.
With yields ticking higher, bond investors can utilize rate-hedged bond ETFs to generate income and help better maintain their principle. Last year, DeAWM introduced the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH), the Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH) and the Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (NYSEArca: EMIH).
IGIH tracks investment-grade corporate bonds, HYIH includes a group of speculative-grade junk bonds and EMIH follows U.S.-dollar-denominated emerging market bonds. However, unlike traditional bond ETFs, these options try to mitigate interest rate sensitivity across the yield curve in a rising rate environment by taking short positions in U.S. Treasury futures.
Through their short positions, IGIH, HYIH, and EMIH have a modified duration of about zero years – duration is a measure of a bond fund’s sensitivity to changes in interest rates. Consequently, since these bond ETFs essentially have a zero duration, a rising interest rate would not negatively affect the investments.
Additionally, as the Fed tightens its monetary policy, the reduced money supply will also help strengthen the U.S. dollar against a basket of foreign currencies. Consequently, stock investors will have pay attention to potential foreign exchange risks associated with investing in overseas equities – weaker foreign currency means that international returns are diminished when converted back into a stronger USD.
Alternatively, international stock ETF investors can look to a number of currency-hedged ETFs that use currency swaps to diminish the negative effects of depreciating foreign currencies or a strengthening U.S. dollar. For instance, the Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEArca: DBEF), which takes the currency hedged exposure of developed Europe, Australasia, Far East countries, was the second most popular ETF of 2015.
Financial advisors who are interested in learning more about investing in a rising rate environment can register for the Thursday, January 28 webcast here.
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.