ETFs for Rising Interest Rates
One enemy, but an arsenal of weapons
December 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- A wide range of strategies are marketed as beneficiaries of rising interest rates
- Portfolios are comprised of equities, bonds, options, long as well as short positions
- However, only financial services companies and short bonds offer a positive correlation to interest rates
INTRODUCTION
In this year, most developed markets have been experiencing inflation last seen decades ago, with the exception of Japan. In October 2021, the land of the rising sun had only a 0.1% change in prices, compared to a whopping 6.2% in the US. Consumers are angry, central bankers seem confused, and investors appear wary.
Theoretically, higher inflation should lead to higher interest rates, which makes fixed income a more attractive asset class again. Paying the German government 0.3% for the next 10 years on their treasury note is hardly a desirable investment (read No Longer Superheroes? Twilight of the Bonds).
However, higher interest rates will devalue existing bond positions and lead to higher discount rates, which should lead to lower valuations of stocks. The counterargument is that higher inflation is partially explained by higher economic growth, which should be positive for corporate earnings.
Leaving economics aside, where theory and reality clash consistently, investors are concerned about rising interest rates. The ETF industry has launched a variety of products that may serve to hedge against, or even benefit from rising rates.
In this research note, we will explore ETFs that supposedly benefit from higher interest rates.
ETF SELECTION
Our typical approach to selecting ETFs for a certain theme is going by their product names as that is what most investors tend to do. However, there are only a few ETFs in the US that seem to address rising interest rates going by their names.
Instead, we will focus on a variety of ETFs that often appear in the financial media in relation to rising interest rates. Many of these provide some income, but the reason for these to benefit from rising rates are quite diverse:
