This article was originally published on ETFTrends.com.
A raging bull market paired with data from the Department of Commerce showing that gross domestic product rose 4.2% in the second quarter gives Federal Reserve Chairman Jerome Powell ample reason for investors to get swept away by a wave of rising interest rates in the central bank's forthcoming monetary policy decisions. However, fixed-income investors can use specific exchange-traded funds (ETFs) as life jackets in the rising tide of rates that could come through the rest of 2018 and possibly beyond.
With no signs of slowing, it appears that a healthy flow of rising rates is in order, according to Boston Federal Reserve President Eric Rosengren. With a monetary policy meeting slated for later this month, Rosengren also forecasts that the current federal funds rate will float between a range of 2.5% to 3%.
“Gradually increasing over the course of this next year makes sense,” Rosengren told CNBC in an interview. “If things work out well for the economy, and that’s what I expect and hope, then we’ll be in a situation where we need to have somewhat restrictive policy over time.”
After the two previous rate hikes earlier this year, the current federal funds rate stands at 2. With two rate hikes already seen through the first two quarters of 2018 and two more expected, bond investors can incorporate fixed-income ETFs into their portfolios that can adjust with the impact of rising rates.
While bonds with floating rate notes are the typical go-to for fixed-income investors, it is also helpful to opt for higher-yielding assets to capture the income earned as a result of higher rates. That being said, here are three fixed-income ETFs that financial advisors can throw to investors to use as life jackets when rate levels keep on rising.
1. SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN)
A floating rate component will be beneficial if the Fed continues to remain hawkish on the economy. FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. FLRN limits duration exposure with investments in debt securities with maturities that don’t exceed five years. In addition, at least 80% of its assets will be allocated towards securities comprising the index, such as U.S. dollar-denominated, investment grade floating rate notes. The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.
2. iShares Floating Rate Bond ETF (FLOT)
FLOT seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index (the "underlying index"), which measures the performance of U.S. dollar-denominated, investment-grade floating rate notes. FLOT invests in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index. Like FLRN, FLOT hedges rate risk as well as credit risk due to its incorporation of investment-grade debt.
3. ProShares High Yield—Interest Rate Hdgd (BATS: HYHG)
HYHG seeks investment results that track the performance of the Citi High Yield (Treasury Rate-Hedged) Index (the "index"). HYHG invests in high-yield bonds included in the index, which is comprised of long positions in U.S. dollar-denominated high yield corporate bonds ("high yield bonds") and short positions in U.S. Treasury notes or bonds of, in aggregate, approximate equivalent duration to the high yield bonds. As rates rise, investors can take advantage of the higher-yielding assets through HYHG.
For more trends in fixed income, visit the Fixed Income Channel.
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