Many investors are looking for ways to hedge their fixed-income portfolios in a rising interest rate environment. Consequently, more are turning to alternative assets and exchange traded funds as a way to diminish portfolio volatility while still maintaining some upside potential.
ETF Trends publisher Tom Lydon spoke with Eric Ervin, Founder & CEO of RealityShares, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk income strategies in a rising interest rate environment.
“Everyone’s been searching for this alternative to fixed income, knowing that rates could someday rise but not knowing when they’re gong to rise,” Ervin said. “The end of last year was kind of the first awakening of that as interest rates started to rise. Some of those alternatives didn’t’ really offer an alternative. They were just other bonds.”
Consequently, more investors and advisors are re-evaluating their positions in the year ahead as we face rising inflation, pro-growth policies out of the Donald Trump administration and a more hawkish Federal Reserve that is seeking to normalize rates.
“I think the biggest thing is to think about bonds as we’ve always thought about them as risk reducers and not return enhancers,” Ervin said. “Now, everything’s kind of flipped where bonds are really that risk enhancer and not really a reason, you know, if anything a return reducer.”
Consequently, Ervin argued that investors looking for alternatives should focus on stability and conservative bets that show low correlation to traditional assets.
For example, the actively managed Reality Shares DIVS ETF (NYSEArca: DIVY) is a good alternative for a conservative fixed-income position in a changing market environment. DIVY tries to provide exposure to the growth rate of expected dividends and looks to deliver long-term capital appreciation rather than income and yield through options contracts and dividend swaps.
“The institutional markets had been investing in this market called dividend swap where they capture the growth rate of dividends on the S&P without any of the interest rate volatility, none of the correlation that you might find otherwise,” Ervin said.