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ETFs to Gain from Rising Rates

·4 min read

Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may become the name of the game thanks to a host of factors ranging from rising inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on supply chain and global growth, and geopolitical issues.

As rising rate worries have been prevalent with the Fed hiking rates faster and fatter this year, both the bond and stock investing are at worse. The Fed enacted a 75-bp rate hike late last week. The rise in rate was the biggest since 1994. The outcome is a slowdown in economic growth.

The Fed downgraded its forecast for 2022 median real GDP growth from 2.8% in March to 1.7% for 2022. It also lowered the growth rate expectations to 1.7% (from 2.2% in March) for 2023 and 1.9% (from 2% in March) for 2024. The unemployment rate is projected to rise from 3.5% to 3.7% for 2022, 3.5% to 3.9% for 2023 and from 3.6% to 4.1% for 2024.

The inflation projection has been upped for this year, while the Fed expects inflation to cool off in 2023 and 2024. The federal funds rate is projected to be 3.4% for 2022 from 1.9% in March, 3.8% for 2023 from 2.8% and 3.4% for 2024 from 2.8%. No wonder, the S&P 500 and the Nasdaq have entered into bear market this year.

Against this backdrop, below we highlight a few ETFs that could gain amid rising rate environment.

iShares Floating Rate Bond ETF FLOT

This ETF offers exposure to U.S. floating rate bonds, whose interest payments adjust to reflect changes in interest rates. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared with traditional bonds. As such, unlike fixed coupon bonds, these will not lose value when the rates go up. Hence, it protects investors from capital erosion in a rising rate environment. The fund charges 15 bps in fees.

iShares Interest Rate Hedged High Yield Bond ETF HYGH

The underlying BlackRock Interest Rate Hedged High Yield Bond Index mitigates the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. It charges 52 bps in fees and yields 4.35% annually.

Simplify Interest Rate Hedge ETF PFIX

This ETF is active and does not track a benchmark.  The Simplify Interest Rate Hedge ETF seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.

The fund’s strategy includes initial investment of 50% of NAV in 7-year OTC payer swaption on the 20-year rate struck at 4.25%, providing direct exposure to rising rates. Option position is a strategic exposure to interest rates, expected to be reset only after extended periods of time or extreme rate moves. Option term and rate maturity are chosen to minimize cost of ownership; option strike and term chosen to maximize convexity. The fund charges 50 bps in fees.

Advocate Rising Rate Hedge ETF RRH

The actively managed Advocate Rising Rate Hedge ETF is a multi-asset ETF that seeks to generate capital appreciation during periods of rising long-term interest rates, specifically interest rates with maturities of five years or longer.

The fund looks to achieve its investment objective primarily by investing in a combination of: U.S. Treasury securities; forwards, futures or options on various currencies; long and short positions on the short and long-end of the Treasury or swap yield curve via futures, swaps, forwards and other over-the-counter derivatives; long and short positions on equity indexes and/or investment companies, including ETFs; and commodity futures and options. The fund charges 85 bps in fees.

Virtus InfraCap U.S. Preferred Stock ETF PFFA

A preferred stock is a hybrid security that has characteristics of both debt and equity. These do not have voting rights but a higher claim on assets than common stock. That means that dividends to preferred stock holders must be paid before any dividend is paid to the common stock holders.

This ETF is active and does not track a benchmark. The Virtus InfraCap U.S. Preferred Stock ETF seeks current income and, secondarily, capital appreciation through a portfolio of over 100 preferred securities issued by U.S. companies with market capitalization of over $100 million. The fund charges 1.21% and yields 9.30% annually.



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