Fixed Income ETF Investment Strategies in a Rising Yield Environment – October 18, 2022

Worries about rising rates have paralyzed the world of investors this year. The global level of inflation is on the rise. The Fed has decreed several rate hikes this year. With the latest US inflation reading beating inflation, the Fed is expected to raise rates further this year.

St. Louis Federal Reserve Chairman James Bullard has left open the possibility of the central bank raising interest rates by 75 basis points at each of its next two meetings in November and December, while saying that it was too early to tell. Benchmark yields on US Treasuries hit the 4% level on October 14.

iShares 20+ Year Treasury Bond ETF (TLT Free Report) has lost about 34% this year. It’s no wonder that in the face of rising bond yields, investors may be wary of investing in fixed income securities, since bond yields and bond prices are inversely related. But there are fixed income avenues that would help investors mitigate these threats while proving profitable. Below we highlight a few:

Interest-Hedged High Yield ETFs

High yield interest rate hedged ETFs take on the risk of rising rates while providing strong current income. This ETF has proven quite resilient in this year’s turmoil.

ProShares High Yield Interest Rate Hedged ETF (HYHG Free Report) includes long positions in USD-denominated high yield corporate bonds and short positions in US Treasuries or bonds of approximately equivalent duration. The ETF returns 5.03% annually and is down 7.2% this year.

Convertible Bond ETFs

Convertible bonds are those that can be exchanged if the holder chooses, for a specific number of preferred or common shares if the company’s stock price exceeds a certain conversion price during the term of the bond. The main difference of the asset with traditional bonds is that convertible bonds offer investors the right to convert their bond holdings into shares of a company at the discretion of the holder.

SSI First Trust Strategic Convertible ETFs (FCVT Free Report) invests at least 80% of its net assets in a diversified portfolio of US and non-US convertible securities. It earns 4.85% per annum and charges 95 basis points in fees. FCVT has lost 2.2% over the past three months.

Senior Loan ETFs

Senior Loans are floating rate instruments and provide protection against rising interest rates. In a nutshell, a relatively high yield opportunity coupled with protection against impending interest rate hikes should help the fund perform better.

Highland Senior Loan ETF/iBoxx (SNLN Free report) could therefore be a good choice for future pieces. It earns around 4.29% per annum and charges 66 basis points in fees. The SNLN is down 7.9% this year.


TIPS are government bonds whose nominal value increases with inflation. TIPS ETFs not only fight rising prices, but also protect long-term earnings.

iShares 0-5 Year TIPS Bond ETF (STIP Free report) earns 3.88% annually and is down 8% this year. The fund charges fees as low as 3 basis points (read: ETF TIPS for betting on higher inflation).

Floating Rate Bond ETFs

Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often linked to an underlying index (such as LIBOR) plus a variable spread depending on the issuer credit risk. The coupons of these bonds being adjusted periodically, they are less sensitive to a rise in rates compared to traditional bonds.

iShares Floating Rate Bond ETF (FLOW Free report) has an effective term of 0.10 years and therefore presents minimal interest rate risks.

Short-term cash ETFs

Investors might want to hold money in uncertainty. We believe that cash and short-term fixed income securities can play a bigger role in the stability of a portfolio.

PIMCO Enhanced Short Maturity Active ETF (MINT Free report) may be appropriate for non-immediate cash allocations. The fund charges 35 basis points, earns 1.17% annually and has lost 3% this year (read: Is cash hoarding a safe bet right now? Focus on ETFs).

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