Scalper1 News
Summary Thanks to weaker than expected job growth and retail sales along with global economic uncertainty, the futures market is not expecting a rate hike until into 2016. Investors want to plan for rising interest rates should look for investments with low duration, low interest rate sensitivity or that can profit from higher rates. In this article, I suggest three different ETFs that can fit those criteria. With the target Fed Funds rate sitting at 0% for the last 6+ years, the Fed is finally getting poised to raise interest rates again. Many watchers felt a rate hike in 2015 was imminent until a slew of economic data – weak job growth and retail sales data along with uncertainty in China – have pushed off rate hike expectations into 2016. Fed funds futures suggest that there’s only a 50-50 chance will see a rate hike at the March Fed meeting with the first likely hike coming in June. For those looking to protect themselves from rising rates, now might be a good time to reposition your portfolio. That means looking for investments that maintain a low duration, staying away from sectors that are highly rate sensitive and looking for stocks that can profit from higher rates. If you’re looking to stay away from interest rate risk, consider these ETFs for your portfolio. The iShares 1-3 Year Treasury Bond ETF (NYSEARCA: SHY ) This is the good old fashioned conservative approach. Its 30 yield of 0.49% won’t necessarily impress income seeking investors but with a beta of near zero this is exactly the type of risk averse investment that those looking for safety should consider. Since its inception in 2002, we’ve been able to see how the fund performs in both a rising rate and falling rate environment. In the 2004-2007 period when the Fed Funds rate rose from 1% to over 5%, the fund managed a total return of around 8%. Not a huge return by any means but it demonstrates how the fund was still able to generate a return even in a rapidly rising rate environment. In the subsequent 2007-2008 period during the financial crisis when the target Fed Funds rate dropped to 0%, the fund returned around 12%. These are solid returns in both scenarios but the risk minimization and capital preservation strategy of this ETF is what matters most. The SPDR S&P Bank ETF (NYSEARCA: KBE ) Banks profit when the yield curve is steeper and interest rates are higher. This fund debuted right at the tail end of when interest rates were rising in 2005. As you can see, the overall performance of the fund followed the Fed Funds rate downward. KBE Total Return Price data by YCharts Conversely, it would be expected that bank stocks should outperform when rates begin moving back up. Being an equity ETF, this will still experience the volatility that comes with investing in the stock market but it should be positioned better than the broader market when rates finally begin to move back up. The PowerShares S&P 500 ex-Rate Sensitive Low Volatility Portfolio (NYSEARCA: XRLV ) Debuting just earlier this year, this ETF looks to isolate the stocks of the S&P 500 that exhibit the lowest volatility and low interest rate sensitivity characteristics of the broader index. The fund’s composition is largely as one would expect. Most of the fund’s assets are invested in financials, industrials, consumer defensive and health care stocks – areas of the market that experience steady demand and are less prone to economic fluctuations. There’s not much of a track record to go on with this ETF but the strategy is such that it should help limit the downside associated with interest rate risk while maintaining broader exposure to the equity markets. Scalper1 News
Scalper1 News