RATES ARE INCREASING... CONSIDER THESE ETFS
Federal Reserve Chair Janet Yellen, who is confident about the outlook for the US economic growth, implies waiting too long to raise interest rates could pressure policymakers to tighten too quickly. As of present, the likelihood of a rate hike is approximately 67%. Granted the central bank is ready to increase rates, China’s economic degeneration and weak US data halt their tracks.
Nevertheless, a rate increase is about to happen. You may opt to beef up your portfolio’s position and counter the perils of rate hikes with these three exchange-traded funds.
IShares Short Maturity Bond ETF
This fund focuses in ultrashort bonds. By nature, bonds and rates do not go along. Hence, long duration bonds are greatly affected once interest rates escalate due to the reverse correlation between bonds and rates. Such bonds become more appealing for rate hikes as low duration and high quality bonds can help traders and portfolio managers attain stable returns to counter inflation. The fund, which normally lasts in 0.41 years, has a credit rating of A. It also has an expense ratio of 0.25% and a yield of 0.84%.
PowerShares S&P 500ex-Rate SnsvLwVtl ETF
Its portfolio is comprised of 100 mid-, large-, and giant-cap stocks from the S&P 500, which have low volatility and lowest interest rate risk. The ETF looks at the historical data to determine how certain stocks react to rates and whether they can hamper their outlook. With a fee of 25 basis points to compensate for the expenses, the fund’s three biggest sector allocations are the following: financials (27.62%), industrials (25.68%), and consumer defensive (15.51%).
SPDR S&P Insurance ETF
The financial sector will benefit the most from a rate hike, except insurance companies. Here’s why: when insurance firms collect premiums from clients, the money is placed into high-quality. Such bonds then generate interest for these entities. Majority of insurance companies use low-duration bonds; hence, they yield next to nothing. But once rates increase, they will one of the first firms to gain from rate increases. The ETF has an expense ratio of 0.35% and a yield of 1.73%. Its market cap spreads through small- and giant-cap, but mid-cap stocks account for nearly 51% of its portfolio.
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