Another 75 basis point rate hike can cause undue stress for fixed income investors looking to mitigate rate risk. Thematic exchange traded fund (ETF) provider Global X has three options to help alleviate the pain.
The Fed reiterated its hawkishness on interest rate policy as inflation continued to climb. Federal Reserve chairman Jerome Powell confirmed that the central bank will do what it needs to do in order to keep inflation in check.
“If we want to set ourselves up, really light the way to another period of a very strong labor market, we have got to get inflation behind us,” said Fed Chair Jerome Powell. “I wish there was a painless way to do that. There isn’t. What we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation. And that’s what we’re doing.”
While there are a plethora of options available to hedge against rate hikes, there’s a more simple solution to consider: the Interest Rate Hedge ETF (IRHG). IRHG seeks to provide a hedge against sharp increases in long-term U.S. interest rates and is expected to benefit during periods of market stress when interest rate volatility is elevated. It is an actively managed ETF designed to benefit when long-term interest rates increase.
Per its fund description, IRHG seeks to achieve its investment objective primarily by investing in long interest rate swap options (“swaptions”) and long positions in short-term U.S. Treasury securities. The latter is used primarily for cash management purposes.
For diversification, IRHG may invest in U.S. Treasury bills directly or through other ETFs. Summarily, IRHG provides investors:
- Institutional exposure: IRHG seeks to achieve its investment objective of providing a hedge against a sharp increase in long-term U.S. interest rates by using over-the-counter (OTC) instruments that are typically only accessible to institutional investors.
- Tactical hedge: By holding options designed to benefit from rising long-term interest rates, IRHG provides access to an efficient fixed income hedging strategy designed to offset interest rate risk in a portfolio.
- Active management: IRHG is an active strategy from the standpoint of interest rate risk management.
Outpace Rate Hikes With Dividends
Another way is to simply beat inflation at its own game by opting for fixed income options that offer more yield. One way to do this is to focus on dividend yields as opposed to other assets like bonds.
Two options to consider that provide dividend income are the Global X SuperDividend U.S. ETF (DIV) and the Global X SuperDividend ETF (SDIV). Of the two options, DIV keeps dividends within the safer confines of U.S. debt, which might be a safer play given the current market uncertainty regarding a recession.
Per its fund description, DIV seeks to provide investment results that generally correspond to the price and yield performance, before fees and expenses, of the Indxx SuperDividend® U.S. Low Volatility Index. The underlying index tracks the performance of 50 equally weighted common stocks, including MLPs and REITs, that rank among the highest dividend-yielding equity securities in the United States.
DIV gives investors:
- High income potential: DIV accesses 50 of the highest dividend-paying equities in the United States, potentially increasing a portfolio’s yield.
- Monthly distributions: DIV makes distributions every month and has done so for over seven years. With rates scheduled to rise in 2022 worldwide, this could translate to higher yields.
- Low volatility: DIV’s index methodology screens for equities that have exhibited low betas relative to the S&P 500 to produce low-volatility returns.
- A 30-day SEC yield of 4.80%.
For bolder investors willing to extract additional yield in lieu of more risk, there are options for dividend-producing equities overseas with SDIV. The fund seeks investment results that generally correspond to the price and yield performance of the Solactive Global SuperDividend Index, which tracks the performance of 100 equally weighted companies that rank among the highest dividend-yielding equity securities in the world, including in emerging market countries.
SDIV features:
- High income potential: Potentially increasing a portfolio’s yield, SDIV accesses 100 of the highest dividend-paying equities around the world.
- Monthly distributions: SDIV makes distributions on a monthly basis and has made distributions each month for over 10 years.
- Global exposure: Investing in equities from around the globe can help diversify geographic and interest rate exposure.
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