7 Stock ETFs to Play a Rate-Increase Cycle

Dr. Horstmeyer also highlighted the outperformance of growth and cyclical stocks during rising interest rate environments. Growth stocks and cyclical industries outpaced value and defensive stocks by 4.65 percentage point per year during the rate-increase cycles.

Targeted ETF Plays

ETF investors can also gain exposure to growth-oriented U.S. equities through more targeted ETFs. For example, S&P 500 growth stocks ETFs include options like the iShares S&P 500 Growth ETF (NYSEArca: IVW), Vanguard S&P 500 Growth ETF (NYSEArca: VOOG) and SPDR S&P 500 Growth ETF (NYSEArca: SPYG).

However, the outperformance does not come without risks. Funds that focus on small-caps and growth stocks have come with slightly elevated levels of volatility over those same rate-increase cycles, compared to their safe counterparts, Dr. Horstmeyer warned.

“But in finance, the bigger rewards do tend to come with the bigger risks,” Dr. Horstmeyer said.

“Thus, with the Fed showing no signs of letting up on rate increases for the next year, it may be the riskier types of funds, rather than those that invest in safe, dividend-paying and large-cap stocks, that deliver the bigger rewards,” he added.