Bets on whether the U.S. Federal Reserve will continue to raise interest rates or not in 2023 are coming in as a challenging 2022 comes to a close. Investors don’t have to play the guessing game with rate hikes by padding their portfolios with exchange traded funds (ETFs) that can address potential increases.
With inflation reaching fever pitch, the Fed has been tightening up monetary policy at a rate that’s not been seen since the 1980s. Of course, this has the capital markets speculating on whether the speed of rate hikes will eventually come at the detriment of economic growth.
“They have raised rates this year at the fastest pace since the early 1980s, including by 0.75 point at each of their past four meetings to combat inflation,” the Wall Street Journal noted. “Fed Chair Jerome Powell indicated last week that the central bank was prepared to downshift the size of rate increases at its coming meeting on Dec. 13-14.”
Consumers are feeling the double whammy of rising prices not just in products or services, but also when it comes to borrowing money. The rate increases are in turn raising the cost of loans across the board.
“Credit card rates are at a record high and still increasing,” said Greg McBride, chief financial analyst at Bankrate.com. “Auto loan rates are at an 11-year high, home equity lines of credit are at a 15-year high, and online savings account and CD [certificate of deposit] yields haven’t been this high since 2008.”
An Active Hedging Strategy
There’s a plethora of options to hedge against rising rates. However, an all-inclusive option is inherent in one ETF via the actively managed Global X Interest Rate Hedge ETF (IRHG).
The fund seeks to achieve its investment objective primarily by investing in long-interest rate swap options and long positions in short-term U.S. Treasury securities. The latter is mainly used for cash management purposes. RATE may invest in U.S. Treasury bills directly or through other ETFs.
- Institutional exposure: RATE 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, RATE provides access to an efficient fixed income hedging strategy designed to offset interest rate risk in a portfolio.
- Active management: RATE gives ETF investors dynamic exposure to rate hedging to allow portfolio managers to alter holdings when market conditions change.
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