U.S. Markets closed

ETFs for Rising Rates


The Federal Reserve has opted to delay tapering its bond purchases but that hasn’t stopped ETF providers from continuing to roll out products designed to mitigate the negative effects of rising interest rates.

“When interest rates rise, bonds and bond funds tend to lose value, a fact that has caused investors to pull out of many traditional bond funds this year,” reports Ashley Lau for Reuters.

To attract and maintain investors, ETF providers have promoted offerings “that focus on bonds but rely on protective strategies like interest rate hedging and defined-maturity portfolios,” according to the article. [Guggenheim Lists More Target-Date BulletShares ETFs]

For example, short-term bond ETFs have pulled in nearly $32 billion of inflows so far in 2013. In particular, PIMCO Enhanced Short Maturity ETF (MINT) has been popular as an alternative to money market funds. [PIMCO MINTs a Winner]

ETFs for floating-rate notes have also seen cash move in the door as a shelter against rising rates. The iShares Floating Rate Bond ETF (FLOT) has gathered nearly $3 billion year to date. [Floater ETF Hauls in Cash on Rising-Rate Fears]

Defined-maturity ETFs from Guggenheim Investments and BlackRock are another tool investors can use to combat higher rates. Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (BSJF) has seen inflows of more than $200 million this year, according to the Reuters story.

“Other ETF providers have introduced products that use hedging strategies to limit rising rate risks,” Lau reports. These funds include ProShares High Yield-Interest Rate Hedged (HYHG) and Market Vectors Treasury-Hedged High Yield Bond ETF (THHY). [Shorting Treasuries Helps Active High-Yield ETF]

ETF providers say they also expect this year’s significant inflows into short-term bond ETFs to continue,” according to the article. These products include Vanguard Short-Term Corporate Bond Index (VCSH), PIMCO 0-5 Year High Yield Corporate Bond ETF (HYS), the iShares 1-3 Year Credit Bond ETF (CSJ) and the SPDR Barclays Short Term High Yield Bond ETF (SJNK).

The opinions and forecasts expressed herein are solely those of John Spence, 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.