The Christmas season may be a time when winter climates around the globe take hold, but in the capital markets, while the snow is falling, the rates are rising. Given the current economic climate, investors need to protect their portfolios from short-term rate adjustments as much as they need to don their parkas.
In fact, the CME Group, who produces a mathematical algorithm that calculates a potential rate increase by the Federal Reserve, is predicting a 78.4% probability that 2018 will end with another rate hike. As such, here are some gift exchange-traded fund ideas advisors can recommend to investors.
1. VanEck Vectors BDC Income ETF (NYSEArca: BIZD)
BIZD seeks to replicate the price and yield performance of the MVIS® US Business Development Companies Index, which is comprised of business development companies (BDCs)–vehicles whose principal business is to invest in, lend capital to or provide services to privately-held companies or thinly traded U.S. public companies. BDCs are able to offer financing to distressed companies when they need a capital injection–as rates rise, these companies can look to BDCs when traditional sources of financing, such as banks can’t fulfill their lending needs.
2. SPDR Bloomberg Barclays Investment Grade Floating 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 Hedged (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 Bond 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 further short-term rate increases should the Federal Reserve continue with an aggressive rate-hiking policy through 2019.
5. 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.
For more trends in fixed income, visit the Fixed Income Channel.