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.