Fresh Fixed Income ETF Strategies for Rising Rates
With the Federal Reserve largely expected to begin hiking interest rates soon, fixed-income assets could weaken, but bond exchange traded fund investors still have some alternative options to help maintain yields and hedge against the rate risks.
On the upcoming webcast, Fixed Income Strategies Ahead of the Fed, James Reiger, Global Head of Fixed Income at S&P Dow Jones Indices, Herb Morgan, CIO and CEO of Efficient Market Advisors, and Scott Eldridge, Director of Fixed Income ETF Product Strategy at Invesco PowerShares Capital Management, help go over fixed-income assets that are vulnerable to rising interest rates and offer alternative strategies to manage risks and maintain yields.
For instance, The PowerShares Senior Loan Portfolio (BKLN) , the largest bank loan-related ETF, provides investors with high yields and protection against rising interest rates.
Since the senior loans have rates that adjust periodically, the floating-rate loans offer investors an alternative method of earning yields with little or no interest-rate risk. Additionally, due to their floating rate component, bank loans are seen as an attractive alternative to traditional corporate bonds in a rising rate environment.
BKLN has an average 33.55 day reset period – the average number of days until the floating component of the loans reset. The ETF also comes with an attractive 6.03% 30-day SEC yield.
Additionally, the PowerShares Variable Rate Preferred Portfolio Fund (VRP) is also a good option for yield generation in a rising rate environment.
Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares.
While preferred stocks provide investors with an attractive source of yields, the assets are vulnerable to rising interest rates – most preferred stocks are are extremely long-dated, which exposes investors to rate risk.
However, the variable-rate perferreds that VRP tracks usually trade more like bonds with shorter durations, so more conservative investors may find the lower-risk profile appealing. Specifically, VRP has an effective duration of 3.94 years and comes with a 5.19% 30-day SEC yield.
Financial advisors who are interested in learning more about fixed-income strategies can register for the Tuesday, December 2 webcast here.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
