The Federal Reserve hiked its benchmark interest rates for the third time this year and told investors three more hikes are on the way in 2018, and perhaps more in the years after that. Nevertheless, fixed-income investors can still hedge against higher rates with targeted exchange traded fund strategies.
Economist from Citigroup and J.P. Morgan & Chase are predicting average interest rates across advanced economies may rise at minimum 1% next year, the fastest annual pace since 2006. For starters, the Fed hiked by a quarter percentage point Wednesday.
Consequently, fixed-income investor should be prepared for 2018 being a key year for monetary normalization.
Potential traders, though, should be aware of the risks associated with these geared products and keep in mind that leveraged and inverse ETFs are designed to produce their target strategies on a daily basis. Consequently, when investors look at the long-term performance of a leveraged or inverse ETF, people may notice that the funds do not perfectly reflect their intended strategies.
Furthermore, fixed-income investors may consider the relatively new interest-rate hedged bond ETF theme as a way to gain long exposure to debt securities and generate a steady income stream while hedging against the negative effects of rising rates.
Investors do not need to sacrifice yields to diminish rate risk. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise. Due to their near-zero durations, the rate-hedged bond funds should show little to no sensitivity to changes in interest rates. These types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment ahead.