With the Federal Reserve embarking on monetary policy normalization and raising interest rates ahead, ETF investors may do well with small-cap and growth exposures.
With yields on benchmark ten-year U.S. Treasuries recently crossing above 3% and the Federal Open Market Committee continuing to tighten its monetary policy, FTSE Russell examined performance of an array of asset classes during periods of rising interest rates.
Over the past 25 years, the equity market has performed well during periods of rising interest rates, Alec Young, Managing Director of Global Markets Research, FTSE Russell, said in a research note. Since rates often rise in reaction to accelerating economic growth, this type of growing environment is is ultimately good for corporate profits and, hence, stock prices.
“Not surprisingly, economically sensitive equity asset classes like small caps have fared best, with the Russell 2000 Index generating a healthy 22.2% annualized return while the Russell 1000 Growth Index has also chalked up an impressive 20.1% annualized return. The large cap Russell 1000 Index has posted a very respectable 16.2% return while the Russell 1000 Value Index has risen 12.5% and the FTSE Nareit All Equity REITs Index has risen 7.5%,” Young said.
Those who are interested in gaining exposure to these potentially strong performing segments of the U.S. equities market can look to broad stock ETFs. For instance, the iShares Russell 1000 Growth ETF (NYSEArca: IWF) reflects growth-oriented companies taken from the benchmark Russell 1000 while the iShares Russell 2000 ETF (NYSEArca: IWM) focuses on the broad small-cap benchmark.
On the other hand, fixed-income assets have underperformed as the Federal Reserve increased its benchmark interest rates.
“Not surprisingly, bonds have not fared as well during periods of rising rates with the 10-year Treasury note losing an annualized 5.8% and investment grade corporate bonds gaining only slightly. However, given their significant exposure to the health of corporate credit, which tends to improve as the economy expands, corporate bonds have fared well posting 15% gains,” Young added.
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