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Bond ETF Strategies to Shield Against Rising Rates


With the markets largely expecting the Federal Reserve to hike benchmark interest rates next year, it is never too early to start thinking about exchange traded fund options that can help mitigate the negative effects of rising rates.

Traders are boosting U.S. short-term interest-rate futures contracts, revealing about a 55% chance the first Fed rate hike could occur in June 2015, up from a 52% chance before the Thursday employment report, Reuters reports.

Meanwhile, BlackRock argues that the Fed could even raise rates by the first quarter after the stronger-than-expected jobs growth.

“The Fed will move faster than people think because the data is extraordinarily compelling,” Rick Rieder, chief investment officer for fundamental fixed income at BlackRock, said in a Bloomberg article. “If the data continues along the runway that it’s at, there’s no reason why it can’t move faster.”

Accordingly, investors can utilize a range of fixed-income ETF options to mitigate the negative effects of rising rates, as witnessed last year.

For starters, investors can go down the yield curve with short-duration bond ETFs. The iShares Barclays 1-3 Year Treasury Bond Fund (SHY) has a 1.92 year duration, Schwab Short-Term U.S. Treasury ETF (SCHO) has a 1.97 year duration and Vanguard Short-Term Government Bond ETF (VGSH) has a 1.9 year duration. Duration is a measure of a bond fund’s sensitivity to changes in the interest rates, so a 1% increase in interest rates could translate to about a 1.9% decline in each of these short-term ETFs. [Short-Term Debt ETFs Weakening Ahead of Rising Rate Expectations]

Alternatively, floating rate securities automatically adjust at periodic intervals in response to changes in the interest rates. The PowerShares Senior Loan Portfolio (BKLN) , a floating-rate, high-yield, senior loan ETF, resets its floating component every 18.2 days.

Other floating rate bond ETFs include the iShares Floating Rate Bond ETF (FLOT) , SPDR Barclays Investment Grade Floating Rate (FLRN) and Market Vectors Investment Grade Floating Rate (FLTR). All of these ETFs, though, track corporate sectors, mainly financials and industrials.

The recently launched WisdomTree Bloomberg Floating Rate Treasury Fund (USFR) and the iShares Treasury Floating Rate ETF (TFLO) both track U.S. Treasury floating rate bonds. [Two Floating Rate ETFs Launch]

Additionally, the more aggressive trader can actively hedge against rising rates with inverse long-term Treasury bond ETF options. For instance, the ProShares UltraShort 20+ Year Treasury ETF (TBT) seeks to provide twice, or 200%, the inverse daily performance of Treasuries with maturities greater than 20 years, and Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (TMV) tries to reflect the daily 300% inverse performance of the NYSE 20 Year Plus Treasury Bond Index, which holds long-term 20 year and greater maturity range of U.S. Treasuries. The inverse ETFs will benefit from rising rates and falling Treasury bond prices.

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

Max Chen contributed to this article.

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.