A Fixed-Income ETF Option to Approach a Rising Rate Environment

With the Federal Reserve likely to stay the course and slowly normalize interest rates, fixed-income investors may consider exchange traded fund options that limit exposure to debt securities that are more exposed to rising rate risks.

Bond investors have been prepping for a rising rate environment, but many may not be taking it seriously or making the necessary arrangements before hand.

“We believe that the market is underpricing the likely pace of rate hikes by the Fed in 2017 and 2018,” Guggenheim analysts, lead by Brian Smedley, said in a research note. “Importantly, Fed Chair Janet Yellen noted in March that the FOMC’s baseline forecast of two additional rate increases in 2017 and three more in 2018 was not conditioned on expectations for fiscal stimulus. Rather, it reflected a need to gradually remove accommodation due to the fact that the Fed has essentially achieved its dual mandate objectives for employment and inflation. Fiscal easing, if it materializes, could result in a faster pace of tightening, she explained, as could a further overshooting of the Fed’s labor market objectives.”

Consequently, Guggenheim’s fixed-income team have invested primarily in investment-grade securities to help investors meet income and return objectives in the environment ahead.

“We believe investors’ income and return objectives are best met through a mix of asset classes, both those that are represented in the [Bloomberg Barclays Agg] benchmark, and those that are not,” Guggenheim analysts said.