The prospects of rising rates amid an anemic global-economic recovery has challenged even the most seasoned investors to generate meaningful returns.
Thanks to the proliferation of ETFs, investors can do a number of things to maximize their portfolios’ returns as we drudge through a low-yield environment and approach the inevitable interest-rate hike.
The Obvious
Some of the more obvious, widely discussed ways to welcome the rising-rate environment are:
- Reducing your portfolio’s duration with short-term bond ETFs
- Embracing dividend-paying stocks
- Adding exposure to income-focused ETFs
See also Three Bond ETFs That Aren’t Scared of Rising Rates.
Creative Ways to Fight Rising Rates
The diverse ETF universe makes it possible to get a little more creative for those willing to think outside the box when it comes to portfolio management.
Here are five not-so-obvious ways to deal with rising rates:
5. Forget Interest Rates, Focus on the Economy
A rising-rate environment is synonymous with improving economic growth, so take advantage and invest in growth-sensitive sectors in lieu of defensive ones. Historical research shows the current environment is ripe for sectors such as energy, industrials, technology and consumer discretionary to outperform the broader market.
Here’s a list of some sector-specific ETFs.
4. Stop Playing Bond “Defense”
Don’t make the mistake of overexposing yourself to short-term duration bonds, because you’re likely to miss out on returns if the rate hikes come in even slower than what already is anticipated. Historical research shows high-yield debt may produce very lucrative returns during periods of rising rates.
Fixed-income ETFs that boast a juicy yield – be it junk bonds or emerging market debt focused – warrant a closer look for individuals looking to cushion their portfolios from movements in interest rates; furthermore, if rates stay low longer than anticipated, having an investment that offers an attractive yield isn’t such a bad thing to be left with in your portfolio.
3. Reduce Cost
Although this tip may be considered a “no brainer,” there’s no debate that reducing your total investment costs is a surefire way to beef up your returns without changing your strategy. One way to do this would be to rebalance your portfolio with the cheapest ETF that suits each goal you wish to satisfy.
Be sure to see ETFdb’s list of the Cheapest ETF for Every Investment Objective.
2. Avoid the Hike at Home, Invest Abroad
There are a number of countries to invest in overseas that arguably offer much better risk-return characteristics than the domestic equity market for those with a long-enough time horizon (and a stomach for volatility). Consider this free tool to compare foreign equity market valuations and use it in conjunction with ETFdb’s Free Country Exposure Tool to find the best-fit ETF.
Read more about Investing Abroad While Avoiding China.
1. Don’t Settle for Market Cap-Weighted ETFs
Now, more than ever, amid a challenging investing environment around the globe, it makes sense to utilize the plethora of smart beta ETFs out there designed to outperform “plain vanilla,” cap-weighted funds susceptible to a number of drawbacks. Alternatively, you also could take a closer look under the hood and see if there’s an actively managed ETF that reflects your individual investment objectives, and utilize that product.
Be sure to read more about the 5 Core Smart Beta You Need in Your Portfolio.
The Bottom Line
Recent market volatility has offered an opportunity for keen investors to reassess and rebalance; that’s not to say you should liquidate your entire portfolio and start from scratch in light of rising-rate expectations. Instead, take more calculated moves and stick to the basics such as reducing your portfolio’s duration, maximizing yield and positioning for stronger economic growth on the equity front.
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