ETF Strategies to Play Amid Rising Treasury Yields

Key Takeaways

Market volatility returned after a sharp rise in bond yields; 10-year Treasury yield hit a 14-month high.
Skepticism has grown for any near-term interest rate cuts, with predictions of no Fed action until September.
ETF strategies focusing on senior loans, floating rate bonds and niche funds may help weather high rates.

Wall Street has been under pressure lately due to losses in the tech sector. A sharp rise in bond yields caused by the fading Fed rate cut hopes led to the market volatility. The 10-year Treasury yield climbed to a 14-month high near 4.79% as bonds were sold off, while the dollar surged to a two-year high against major currencies.

These developments reflect market skepticism about near-term interest rate cuts, with traders predicting no rate reductions until at least September, according to the CME FedWatch tool. Persistent inflation above the central bank’s 2% target remains a key concern. The December jobs report, which showed strong labor market conditions, has already dampened hopes of multiple rate cuts in 2025.

Oil Prices Surge Amid Geopolitical Tensions

Oil prices have been hovering around their highest levels in five months. United States Oil Fund LP (USO) gained about 5% past week. The surge in oil prices came as the United States imposed stricter sanctions on Russia’s crude exports, raising concerns over supply disruptions to major buyers like China and India (read: Oil Prices Climb Amid Rising Geopolitical Tensions: ETFs to Win/Lose).

ETF Strategies to Follow

Given this, investors must be interested in finding out all possible strategies to weather a rise in interest rates. For them, below we highlight a few exchange-traded fund (ETF) investing tricks that could gift investors with gains in a rising rate environment.

Tap Senior Loan ETFs

Senior loans are floating-rate instruments that provide protection from rising interest rates. This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically which help in eliminating interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space.

Virtus Seix Senior Loan ETF SEIX, which yields about 8.08% annually and Invesco Senior Loan ETF BKLN, which yields 8.40% annually, are good picks here.

Play Floating Rate Bond ETFs

The floating-rate bond has been an area to watch lately amid a rising rate environment. Floating-rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.

Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.

iShares Floating Rate Bond ETF FLOT (yields 5.81% annually) and iShares Treasury Floating Rate Bond ETF TFLO (yields 5.21% annually) are two examples in this category.

Time for Cash-Like ETFs?

We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed may not cut rates faster and short-term bond yields may stay high for a little longer. That would result in a similar rate for cash-like assets such as money-market funds.

Investing options include JPMorgan UltraShort Income ETF JPST (yields 5.16% annually), Invesco Global ex-US High Yield Corporate Bond ETF PGHY (yields 7.46% annually) and Fidelity Low Duration Bond Factor ETF FLDR (yields 5.50% annually). Such short-term bond ETFs also have lower interest rate sensitivity.

Hedge Rising Rates With Niche ETFs

There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF PFIX (yields 3.20% annually), Global X Interest Rate Hedge ETF RATE (yields 3.93% annually) and Foliobeyond Rising Rates ETF RISR (yields 5.59% annually).

Go Short With Rate-Sensitive Sectors

Needless to say, sectors that perform well in a low-interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares UltraShort Real Estate SRS, ProShares Short Real Estate REK and ProShares UltraShort Utilities SDP are such inverse ETFs that could be the winning bets in a rising rate environment.

Short U.S. Treasuries

Plus, shorting U.S. treasuries is also a great option in such a volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF TBT, Direxion Daily 20+ Year Treasury Bear 3x Shares TMV and ProShares UltraShort 7-10 Year Treasury PST.