When Fed Chairman Bernanke hinted in May of a tapering in the quantitative easing program, interest rates spiked with the 10-year Treasury yield rising a full percentage point to 2.6 percent.
The move sent most fixed income funds lower. The iShares 20+ Year Treasury (TLT) has plunged 13 percent since May. There are some fixed income ETFs that are better positioned for a rising rate environment. Here is my list:
The most obvious choice is ProShares Short 20+ Year Treasury (TBF). This ETF attempts to match the inverse of the daily movement in Treasury securities, so rising rates are good for this fund. Since May it is up 14 percent.
What’s the downside? It uses the futures market so it can lose some ground as it rolls into new contracts. Plus its expense ratio is 0.95 percent. This is a good trading vehicle, but it is not for buy-and-hold investors.
With an improving economy, junk bonds have performed exceptionally well. The most popular ETF in this area is SPDR High Yield Bond (JNK). Because of its shorter duration, however, a better choice is SPDR Short Term High Yield Bond (SJNK). Its average duration of 3.6 years insulates investors from rising rates and it yields 7.3 percent.
What’s the downside? It will lose value if the economy slows or if interest rates rise because of inflationary pressure. This fund is only off 1.7 percent since May.
Market Vectors Investment Grade Floating Rate (FLTR) invests in high quality corporate notes whose coupons periodically reset to current interest rates. So when rates rise this fund will yield more.
What’s the downside? The fund currently yields a measly 0.56 percent. That’s too low for me.
I’ll have more ETFs for today’s marketplace in an upcoming issue.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.