For instance, the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH), iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH), Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY), ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and WisdomTree Barclays U.S. Aggregate Bond Zero Duration Fund (NYSEArca: AGZD) are some options for fixed-income investors to maintain their bond exposure while hedging against rising interest rates.
Alternatively, senior secured floating-rate bank loans could also be a way for fixed-income investors to maintain yield generation while hedging rate risk. Senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates. Because rates are typically reset once per quarter, senior loans typically have low durations. Since the senior loans have rates that adjust periodically, the floating-rate loans also offer investors an alternative method of earning yields while mitigating interest-rate risk.
For instance, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, has an average 27.9 day to reset period. Other options include the Highland/iBoxx Senior Loan ETF (NYSEArca: SNLN), and actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) and First Trust Senior Loan ETF (NasdaqGM: FTSL).
Lastly, looking at the equities market, banks would benefit from a steepening yield curve. With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could also experience improved net interest margins or improved profitability as the firms borrow short and lend long.
As the financial sector capitalizes on improved margins, investors can look to bank-focused ETFs, such as the iShares U.S. Regional Banks ETF (NYSEArca: IAT), SPDR S&P Regional Banking ETF (NYSEArca: KRE), PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR) and SPDR S&P Bank ETF (NYSEArca: KBE). The widely observed Financial Select Sector SPDR (NYSEArca: XLF) also includes a 34.3% tilt toward the banking sub-sector.
Despite the negative implications of an interest rate hike, investors may still find opportunities in various segments of the market.