An exchange-traded fund (ETF) is a pooled investment security operated similarly to a mutual fund.
Usually, ETFs track a particular market sector, commodity, asset, or index. However, unlike mutual funds, ETFs can be sold or purchased on a stock exchange similar to typical stocks can. ETFs can be structured to track anything from diverse, extensive collections of securities or the price of individual commodities.
Exchange-traded funds can be structured to follow particular investment strategies.
What are some ETF opportunities for investors that may benefit from rising interest rates?
iShares iBoxx High Yield Corporate Bond ETFs (HYG)
High-yield bonds are attractive, with current and upcoming rate hikes on the horizon. Experts say that more than $7 trillion in money market accounts and well over $15 trillion in bank accounts are receiving almost zero yields.
Less and smaller regular rate hikes can give investors the confidence to move some funds to funds or accounts with higher yields.
SPDR S&P Regional Banking ETF (KRE)
Regional banks are positioned better than larger banks to feel benefits from rising rates as they raise the rates they charge their client lenders.
Banks make most of their regional revenue from lending. Conversely, larger banks diversify their income into other areas like financial services and equity trading.
Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)
One fund to look into is the Quadratic Interest Rate Volatility and Inflation Hedge ETF, which primarily invests in Treasury Inflation-Protected notes (TIPs). Financial experts say that IVOL benefits from highly volatile markets; however, the correlation to interest rates is uncertain.
Over time, TIPs as inflation hedges have had mixed performance. They also continue to fall in value as interest rates rise.
IVOL purchases options, which the fund pays premiums for. This commonly reduces the available yields generated by TIPs holdings.
Horizon Kinetics Inflation Beneficiaries ETF (INFL)
Horizon Kinetics Inflation Beneficiaries ETF invests in commodities, energy, and financial services companies.
The fund invests in stocks rather than interest hedges or bonds and generally has meaningful beta exposure to the stock market. If higher interest rates contribute to a worsening economic environment, the fund may decline in value or be adversely affected by the stock market.
FolioBeyond Rising Rates ETF (RISR)
Another fund for investors to consider is the FolioBeyond Rising Rates ETF, which invests primarily in U.S. Treasury bonds and mortgage-backed interest-only securities.
RISR is engineered to experience an increase in net asset value by close to 10%. There are very few other ETFs such as measurable, direct exposure to long-term and medium-term rates.
The market impact of ETFs
Since ETFs have grown in popularity with investors, various new funds have been created. This results in low trading volumes for many of them and investors’ inability to easily buy and sell shares of low-volume ETFs.
Surfaced concerns about the influence of ETFs on the market and whether or not a demand for these funds can create fragile bubbles or inflate stock values. ETFs have played significant roles in market instability and market crashes.
ETFs were critical factors in the market declines and flash crashes in 2010, 2015, and 2018.
