A raging bull market combined with the latest data from the Department of Commerce showing that gross domestic product rose 4.1% in the second quarter gives the Federal Reserve ample reason for rate hikes. As such, fixed-income investors must be wary of utilizing strategies that can help them ride this wave of rising rates.
With two rate hikes already seen through the first two quarters of 2018 and two more expected, bond investors can incorporate fixed-income ETFs into their portfolios that can adjust with or nullify the impact of rising rates. While bonds with floating rate notes are the typical go-to for fixed-income investors, it is also helpful to opt for short duration debt to minimize exposure to interest rate risk.
Related: An ETF That Taps Into Closed-End Funds for High Yields
1. SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: FLRN)
A floating rate component will be beneficial if the Fed continues to remain hawkish on the economy. FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. FLRN limits duration exposure with investments in debt securities with maturities that don’t exceed five years. In addition, at least 80% of its assets will be allocated towards securities comprising the index, such as U.S. dollar-denominated, investment grade floating rate notes. The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.
2. ProShares High Yield—Interest Rate Hdgd (BATS: HYHG)
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade. By targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
3. iShares Floating Rate Bond ETF (BATS: FLOT)
FLOT seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index (the “underlying index”), which measures the performance of U.S. dollar-denominated, investment-grade floating rate notes. FLOT invests in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index.
4. SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB)
SPSB seeks investment results that correlate with the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index, which is designed to measure the performance of the short term U.S. corporate bond market. Like VCSH and CSJ, SPSB focuses on investment-grade holdings with short durations to hedge against credit risk. Based on Yahoo! Finance, SPSB has been able to generate a 1.28% return for investors within the last three years.
5. Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH)
VCSH tracks the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index–a market-weighted corporate bond index with a short-term dollar-weighted average maturity. In addition to VCSH allocating capital towards debt issues that are investment-grade, fixed-income investors will like the reduced exposure to duration with maturities between 1 and 5 years.
For more trends in fixed income, visit the Fixed Income Channel.