It has been years since investors have had to deal with rising interest rates, so it is a good idea to consider strategies and ETF investments that can hold up as the Federal Reserve hiked rates.
For instance, fixed-income investors can look to floating-rate notes or debt securities that may more or less negate the negative effects of rising interest rates on the debt securities’ principal.
The notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
If you want to put your cash to work but are not ready to commit to long-term risks, fixed-income investors may consider a floating rate bond ETF, such as the VanEck Vectors Investment Grade Floating Rate (NYSEArca: FLTR) to act an alternative to traditional cash instruments. FLTR shows a 2.09% 30-day SEC yield and an effective duration of 0.13 years.
As a result of the safe and conservative nature of floating rate bonds, investors should not expect high yields. Nevertheless, Treasury money market funds are so starved for yield that anything with an extra basis point or two and the quality and liquidity of a Treasury security will provide an attractive alternative.
Additionally, Investors looking for a high-yield, equity income position may consider Business Development Company, or BDC, exposure to complement a traditional income-oriented portfolio. BDCs are comprised of companies that fund small- to mid-sized private companies, which are usually rated below investment grade or not rated at all. Furthermore, these companies should also do relatively well in the kind of environment ahead where many expect an increase in interest rates since most BDC loans set to float with interest rate benchmarks.
For example, the VanEck Vectors BDC Income ETF (NYSEArca: BIZD) offers a pure play to BDCs. According to VanEck, 80% of the portfolio is allocated to floating rate loans, there is limited rate risk. The ETF also comes with an attractive 9.19% 30-day SEC yield.
For more information on the fixed-income markets, visit our bond ETFs category.