Displaying items by tag: rates

(New York)

If there were ever a time to be worried about rate risk it is now. The US economy is red hot and the Fed continues to look hawkish. Two rate hikes by the end of the year look like a certainty. So how can one protect their portfolio? One answer is floating rate bonds, and especially floating rate investment grade bonds with a range of durations. One ETF that does just that is the X-trackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH). The ETF sports a yield of over 3%, and very importantly, it has a duration of almost zero, meaning it should be almost completely unaffected by any movement in rates.

FINSUM: a 3% yield with no rate risk sounds like a very good investment in the current environment.

(New York)

Retail clients, and some advisors, are adopting an increasingly defensive outlook on the market as the economy roars and rate hikes look more and more certain (not to mention soaring valuations). So what are the best defensive ETFs to protect a portfolio? The range of defensive strategies is broad—from dividend-focused, to shorting, to multi-factor. Some of the most popular include the AdvisorShares Dorsey Wright Short ETF, the Fidelity Dividend ETF for Rising Rates, or the Principal Mega-Cap Multi-Factor Index ETF.

FINSUM: It seems a smart choice to have defense ETFs be a decent portion of one’s portfolio right now. That said, we would be anxious to make shorting-focused ETFs a substantial holding.

(New York)

This is a tough time to be buying bonds. Prices have become very rich over the last several years and on top of sky high valuations and low yields the risk of rising rates causing big losses is high as the Fed sticks to its hawkish path. With that in mind, floating rate bonds and ETFs are a good strategy to combat the situation, as their yields rise as the market’s do. Most also invest in short-term bonds to lessen interest rate risk. Two of the most popular floating rate ETFs are the iShares Floating Rate Bond ETF (FLOT) and SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN). Both hold floating rate bonds with maturities of 5 years and under.

FINSUM: These seem like good options. The one downside to these ETF is that yields are quite low given their conservative nature, but they obviously have great downside protection.

(New York)

As the ten-year anniversary of the last crisis has arrived this month, it is a fitting time to be thinking about what might cause the next one. In fact, many investors, professional and retail alike, are fairly obsessed with calling the next big blow up. But what might cause it? While trade war and political strife grab a lot of headlines, the real driver of the next crisis will be the Fed. The two big worries on that front are rising rates, but perhaps even more worryingly, its shrinking balance sheet. Crises have historically happened when money supply grew tighter, and that is what is occurring right now.

FINSUM: The markets have never been through the winding down of a major QE program, so it is hard to foresee how this may playout. Logic says that the next big blowout will probably be tied to the end of easing.

(New York)

A big bank has just gone on the record warning investors that a bear market is likely to start by the end of the year. So long as the Fed hikes twice more this year, which it is widely expected to do, a key bear market indicator will have been tripped. That indicator is the so-called “neutral level for interest rates”. The indicator preceded both the 2000 and 2007 bear markets. The idea is that the Fed will raise interest rates above their “neutral” level—the level at which they neither stimulate nor hold back the economy—and in doing so, will bring on a recession and bear market. The observation comes from bank Stifel, which summarized their view as “Weighing stability versus mandate, we believe the Fed has no realistic option other than to follow its projected dot-plot path, eventually revealing the speculative excesses created in the past decade”.

FINSUM: When you combine this indicator with the near yield curve inversion, it paints a very bleak picture indeed.