On Monday, U.S. stocks slumped as the 10-year Treasury yield surged past 4%, a level not seen since August. This came ahead of a week marked by important inflation data and the start of the earnings season. The release of upbeat jobs data for the month of September indicated economic well-being as well as lowered the chances of hefty Fed rate cuts in the near term.
Inside September Jobs Data
U.S. job gains rose by the most in six months in September and the unemployment rate declined to 4.1%, pointing to a solid economy. Nonfarm payrolls increased by 254,000 jobs in September. Economists polled by Reuters had forecast payrolls would rise by 140,000 positions after advancing by a previously reported 142,000 in August.
Stronger hiring and low layoffs combined to lift average hourly earnings, which rose 0.4% after gaining 0.5% in August. Wages increased 4.0% on a year-on-year basis after climbing 3.9% in August. The average workweek, however, fell to 34.2 hours from 34.3 in the prior month, per Reuters.
Oil Prices Surge as Geopolitical Tensions Rise
Oil futures jumped over 3.5%, marking their largest weekly gain in over a year. Traders are concerned that Israel’s response to Iran’s recent attack might target the country’s petroleum fields. Additionally, Hurricane Milton's upgrade to Category 5 status in the Gulf of Mexico contributed to the spike in crude prices (read: Oil Logs Big Weekly Gain in a Year: Leveraged Energy ETFs Surge).
Federal Reserve Rate Cut Expectations Shift
Hopes for a significant rate cut by the Federal Reserve have diminished following a stronger-than-expected September jobs report. Traders had previously anticipated a 0.50% rate cut in November, but now there is an 88% chance of a smaller 0.25% cut, according to the CME FedWatch Tool.
ETF Strategies to Follow
Given this, investors must be interested in finding out all possible strategies to weather a rise in interest rates. For them, below we highlight a few exchange-traded fund (ETF) investing tricks that could gift investors with gains in a rising rate environment.
Tap Senior Loan ETFs
Senior loans are floating rate instruments thus providing protection from rising interest rates. This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically which help in eliminating interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space.
Virtus Seix Senior Loan ETF SEIX, which yields about 8.78% annually and Invesco Senior Loan ETF BKLN, which yields 8.62% annually are good picks here.
Play Floating Rate Bond ETFs
The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF FLOT (yields 5.94% annually) and iShares Treasury Floating Rate Bond ETF TFLO (yields 5.41% annually) are two examples in this category.
Time for Cash-Like ETFs?
We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed may not cut rates faster and short-term bond yields may stay high for a little longer. That would result in a similar rate for cash-like assets such as money-market funds.
Investing options include JPMorgan UltraShort Income ETF JPST (yields 5.29% annually), Invesco Global ex-US High Yield Corporate Bond ETF PGHY (yields 7.54% annually), and Fidelity Low Duration Bond Factor ETF FLDR (yields 5.60% annually). Such short-term bond ETFs also have lower interest rate sensitivity.
Hedge Rising Rates With Niche ETFs
There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF PFIX (yields 9.66% annually), Global X Interest Rate Hedge ETF RATE (yields 3.82% annually) and Foliobeyond Rising Rates ETF RISR (yields 7.23% annually).
Go Short with Rate-Sensitive Sectors
Needless to say, sectors that perform well in a low-interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares UltraShort Real Estate SRS, ProShares Short Real Estate REK andProShares UltraShort Utilities SDP are such inverse ETFs that could be wining bets in a rising rate environment.
Short U.S. Treasuries
Plus, shorting U.S. treasuries is also a great option in this type of a volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF TBT, Direxion Daily 20+ Year Treasury Bear 3x Shares TMV and ProShares UltraShort 7-10 Year Treasury PST.
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ProShares UltraShort 20+ Year Treasury (TBT): ETF Research Reports
ProShares UltraShort 7-10 Year Treasury (PST): ETF Research Reports
Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV): ETF Research Reports
iShares Floating Rate Bond ETF (FLOT): ETF Research Reports
Invesco Senior Loan ETF (BKLN): ETF Research Reports
iShares Treasury Floating Rate Bond ETF (TFLO): ETF Research Reports
Invesco Global ex-US High Yield Corporate Bond ETF (PGHY): ETF Research Reports
Fidelity Low Duration Bond Factor ETF (FLDR): ETF Research Reports
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