Rising interest rates may reach a level that matches U.S. President Donald Trump’s relationship with the media. The president’s disdain for rate hikes won’t gain any sympathy from the Federal Reserve as the minutes from the Federal Open Market Committee session from Sept. 25-26 were released yesterday, which showed Fed members indicating that more rate hikes are likely to come.
In September, the Fed raised the federal funds rate by 25 basis points to its current level of 2.25, citing continued strength in the economy. As such, the path to higher rates would likely be sustained as long as the economic data continues to support growth.
“With regard to the outlook for monetary policy beyond this meeting, participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions, and inflation near 2 percent over the medium term,” the minutes noted.
After the rate hike announcement, President Trump took time to denigrate the move during a political rally in Pennsylvania.
“I think … the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy,” Trump said at the rally.
The general consensus within the capital markets is that a fourth rate hike to end 2018 is ahead, which investors need to address with respect to their bond portfolios. Here are five fixed-income ETFs investors should consider as the Fed institutes more short-term rate hikes.
1. 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.
2. 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.
3. 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.
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. SPSB focuses on investment-grade holdings with short durations to hedge against credit risk.
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.