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3 Bond ETFs to Position for Higher Interest Rates

This article was originally published on ETFTrends.com.

With rising interest rates widely expected to continue this year, some fixed income strategies and exchange traded funds merit additional consideration.

While the Federal Reserve has raised rates multiple times over the past several years, the central bank's pace of rate hikes has been slow. In fact it “represent(s) one of the flattest Fed hiking trajectories in their monetary tightening history. It has taken the Fed 910 days to raise the benchmark rate 1.75%, far longer than the 559 days, on average, that it took them to move the Fed Funds rate 1.75% in the previous four rate hike cycles,” said State Street Global Advisors (SSgA) in a recent note.

The SPDR Portfolio Short Term Treasury ETF (SPTS) offers investors one way of dealing with the Fed's rate hike trajectory. The $480.76 million SPTS tracks the Bloomberg Barclays 1-3 Year U.S. Treasury Index and has an option adjusted duration of just 1.91 years.

SPTS can be paired with funds such as the SPDR Portfolio Long Term Treasury ETF (SPTL) to deal with the Fed's efforts at avoiding an inverted yield curve.

“Given that the Fed is expected to hike rates at least once more in 2018, that issues constricting long-term yields are not likely to be solved quickly and that aging investors are allocating more capital to bonds, the trajectory of the yield curve is likely to only be flatter, not higher,” said SSgA.

Senior Loans, Too

Senior loan funds, including the SPDR Blackstone/GSO Senior Loan ETF (SRLN) , can help investors thrive during the current interest rate climate.

Related: ETF Trends Fixed Income Channel

Due to their floating rate component, bank loans are seen as an attractive alternative to traditional high-yield corporate bonds in a rising rate environment. Bank loan securities allow their interest rate to shift, or float, along with the rest of the market, whereas a fixed interest rate stays constant until maturity.

“Float on the short end of the curve to pick up rising yields with minimal duration (0.11 years), while taking on some credit risk to boost yields on the long end but with less duration than long-term Treasuries (13.6 vs. 17.2 years),” said SSgA.

A floating rates corporates strategy offers investors a higher yield spread over Treasuries with a lower duration than various Treasury only strategies.

For more information on the fixed-income market, visit our bond ETFs category.

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