Bonds: Total Market

(New York)

The whole market is generally afraid of rising rates. Both in 2015 and 2018, there were significant mini-meltdowns about the prospect of aggressive rate rises. One of the aspects that most worries investors is that higher rates will drive participants out of stocks and into higher-yielding bonds. However, while true in some respects, that narrative is far too simple. Higher rates are a symptom of a healthy and growing economy, which means the business fundamentals driving stocks are getting better, a factor which is likely far more important than incremental changes in rates.


FINSUM: We think there is some wisdom in these words, especially as they perfectly encapsulate what has happened with the market this year.

(New York)

There has been a lot of focus in the media lately about rising rates and what they will mean for investor portfolios. The ten-year yield is now well over 3% again, and the Fed looks likely to hike twice more before the end of the year. If your fixed income exposure (and equity exposure) isn’t carefully hedge, it could spell losses. Accordingly, here are three ETFs to help offset rate risk: the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN), the iShares Floating Rate Bond ETF (FLOT), and the ProShares High Yield—Interest Rate Hdgd (HYHG). The first two rely on floating rate bonds of short maturities, while the ProShares fund goes long corporate bonds and short Treasuries.


FINSUM: The performance of these kind of hedged ETFs has been good since rates started rising a couple years ago. They seem to have an important role to play in portfolios right now.

(New York)

Rising rates are definitively upon us. The Fed is poised to hike very soon and is likely to do so again before the end of the year. Some popular sectors, especially those with good dividends—REITs, utilities, telecoms—can suffer badly in rising rate periods. Luckily there are several ETFs that can help advisors hedge their exposure. The most common rate hedged ETFs are bond-based and use a strategy of buying higher-yielding corporate bonds and hedging their rate risk by short-selling Treasuries. The strategy seems to work well. For instance, the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) gained about 11% between the 10-year Treasury’s low in July 2016 to now, while its unhedged cousin, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) lost 0.45%.


FINSUM: That is quite a margin between the two funds, which is a testament to how well the strategy performs in rising rate periods. There are several similar funds out there, and they seem like a good idea right now.

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