RInterest rate concerns have been prevalent since the start of September. Decent economic growth and higher inflation expectations have prompted the Federal Reserve to reflect on the start of a slowdown in quantitative easing. This, in turn, began to boost Treasury yields.
Federal Reserve Chairman Jerome Powell recently said the central bank could start cutting asset purchases as early as November and complete the process by mid-2022. Several officials are even interested in raising interest rates next year.
The announcement of the Fed’s QE cut could come during the policy meeting on 2-3 November. However, Fed Chairman Powell left the door open to a longer wait if needed and stressed that tapering is not directly related to when rates take off.
As a result, the benchmark US Treasury yield jumped to 1.55% (its highest level since June) on September 29 from this month’s low of 1.28% recorded on September 14 on the reduction indices. from the Fed. Rising US Treasury yields will likely have a ripple effect globally.
Given this, investors should be interested in finding all possible strategies to resist a sudden surge in US Treasury yields. For them, we have highlighted some investment tips below that could offer investors gains in a rising rate environment.
Support the Regional Banks
Financial stocks are the direct beneficiaries of rising bond yields over the long term. This time too, there are no exceptions. We can choose ETFs from regional banks like ETF SPDR S&P Regional Bank KRE, as these have a slant towards small cap stocks and are primarily focused on the US economy. As banks borrow money at short-term rates and lend capital at long-term rates, the latest surge in long-term bond yields bodes well for these ETFs.
Go short with rate sensitive sectors
Needless to say, sectors that perform well in a low interest rate environment and offer a higher yield may falter when rates rise. Since real estate and utilities are such industries, it is best to go for reverse REITs or utilities ETFs. ProShares UltraShort Real Estate SRS and ProShares Short Immobilier (REK) are such reverse ETFs that could win bets in a rising rate environment.
Still want exposure to bonds? Look at these ETFs
Floating rate notes are high quality bonds that do not pay a fixed rate to investors but have variable coupon rates which are often linked to an underlying index (such as LIBOR) plus a variable spread based on the credit risk of issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to a rise in rates compared to traditional bonds (read: Hedging rate hikes with variable rate ETFs).
Unlike fixed coupon bonds, these do not lose value when rates rise, making them ideal bonds for protecting investors against capital erosion in a rising rate environment. IShares Variable Rate Bond FLOT is a good bet in this context.
Another option in this space is to use bank loan ETFs like Highland / iBoxx Senior Loan ETF SNLN. Senior loans, also known as leveraged loans, are private debt securities issued by a bank and syndicated by a group of banks or institutional investors. These provide capital to companies with lower investment grade credit ratings. In order to offset this high risk, senior loans generally offer higher returns.
Inverse bond ETFs for profit
There is a way to take advantage of this rising trend in yields, in the form of reverse Treasury ETFs like Short-term cash flow over 20 years and more of ProShares TBF and ProShares Short High Yield (SJB).
High dividend ETFs to save
Investors can take refuge in securities with even higher yields. So,Invesco S&P 500 High Div Low Volatility ETF SPHD, which earns around 3.87% per annum, can be a good bet in a rising rate environment.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.