Market Pulse: Preparing for a rising rate environment
November 12, 2014
The Fed won't raise interest rates until mid-2015, if they raise them next year at all. That doesn't mean investors shouldn't position fixed-income portfolios now for higher rates.
Here are some of my fixed-income favorites:
By looking "outside the box" you can find income securities that will benefit from a rising rate environment. An example is a bank loan fund. Because the loans "float," their interest rate re-sets every few months.
The rate is tied to the London Interbank Offered Rate (called LIBOR). Power Shares Senior Loan Portfolio ETF (BKLN) is a good way to invest in this market. It yields 4.1 percent.
An asset class that will benefit from higher rates is adjustable rate preferred stocks. My favorite is HSBC Adjustable Rate Series D.
The rare on this investment grade security is tied to the highest-yielding Treasury. It currently pays 4.5 percent and its dividend will increase when Treasury rates rise significantly.
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SPDR Short-Term High Yield Bond (SJNK). This ETF invests in high yield (i.e. "junk bonds") fixed-income securities.
The average duration in its portfolio is only 3.4 years, which somewhat insulates this fund from rising interest rates. SJNK yields 5.3 percent.
Another attractive adjustable-rate preferred is the Goldman Sachs Series D. It currently yields 5.1 percent and is rated just below investment grade.
The strength of the Goldman Sachs common stock implies a very low credit risk. The dividend on this security, once it moves above its minimum payment, is tied to LIBOR.
Interest rates won't rise anytime soon and rates will remain low for years. Still, there is more room for them to move higher than lower and bond fund shareholders are facing an increasing risk.
I've already begun moving client funds to securities that benefit from higher rates. After all, higher rates will come.
It's not a matter of "if," it's a matter of "when."
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://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.