Federal Reserve Chairman Jerome Powell confirmed the overall market consensus on Wednesday that interest rates would rise with the announcement that the federal funds rate would elevate by 25 basis points to 2.25.
With tailwinds from an economy that is experiencing forward growth momentum and a stock market that has already seen record levels, the central bank had reason to be even more hawkish for 2019, predicting that the capital markets could expect at least three or more rate hikes.
In the bond markets, activity for high-yield, senior loan and floating rate-focused ETFs ticked higher as investors scrambled to position their portfolios to take advantage of the higher interest rates.
“In fixed income, high-yield (which has been quiet of late) saw some increased activity and was mostly better for sale,” noted Brian Gilman of ETF Sales & Trading at Virtu Financial. “Senior loans and floating rate names remain active to the buy-side.”
Here are six fixed-income ETFs investors can take advantage of now that the Fed has removed their “accommodative” language in their monetary policy and is on a path toward higher rates.
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. 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.
3. iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG)
HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. Investors who have been able to forego the credit risk have seen total returns of 5.49% the last three years and 1.96% the past year based on Yahoo! Finance performance figures.
Related: Fed Projects at Least Three More Rate Hikes in 2019
4. iShares 0-5 Year High Yield Corp Bd ETF (NYSEArca: SHYG)
SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade. Nonetheless, SHYG has managed to return 2.97% year-to-date, 3.75% the past year and 5.62% the last three years.
5. SPDR Blmbg BarclaysST HY Bd ETF (NYSEArca: SJNK)
SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds.
The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade. SJNK has returned 3.12% year-to-date, 4.09% the past year and 5.53% the last three years.
6. Invesco Senior Loan ETF (NYSEArca: BKLN)
BKLN is based on the S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the market-weighted performance of the largest institutional leveraged loans according to market weightings, spreads and interest payments. Senior loans that BKLN incorporates into their debt portfolios are typically used for business recapitalizations, acquisitions, leveraged buyouts, and re-financings. BKLN’s loan portfolio includes the purchase of loans from banks or other financial institutions through assignments or participations.
For more trends in fixed income, visit the Fixed Income Channel.