Best ETFs For Rising Interest Rates – Bankrate.com

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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
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The Federal Reserve has furiously raised interest rates throughout 2022 as it tries to rein in high inflation. After going through much of 2020 and 2021 in a zero-rate environment, investors got comfy with a very accommodative Fed, which floored the gas pedal to help the economy through the pandemic. But now with a much stronger economy and raging inflation, the nation’s central bank is hitting the brakes, making things harder for stock investors and others.
So how do investors continue to invest in this climate and how can they use ETFs to do it? Here are some of the best ETFs for investors looking to defend themselves, and even thrive, amid rising rates.
With rates rising, potentially for years, investors are looking for the best industries and investments that can thrive in that environment. The types of investments that tend to do well as rates rise include:
While stocks may offer the most upside over time, investors sometimes need access to the safety of bonds – yes, even amid rising rates. That’s why it’s important to have a “go-to” bond ETF with low downside and the prospect of an annual yield, too.
The ETFs included below hail from the categories above, and they also offer a low expense ratio, helping you to minimize your out-of-pocket costs. (Data as of August 1, 2022.)
The Vanguard Value ETF tracks the performance of the CRSP US Large Cap Value Index, a collection of big companies trading at relative discounts. With a rock-bottom expense ratio, a strong long-term record and about 20 percent exposure to financials, this fund should perform well in a rising-rate environment.
Yield: 2.5 percent
Expense ratio: 0.04 percent
This ETF tracks the total return of the Dow Jones U.S. Dividend 100 Index, which consists mainly of large American companies. The dividend yield sits on the high end of the scale, while the long-term track record – nearly 14 percent gains annually in the 10 years to August 2022 – suggests this ETF will continue to perform well.
Yield: 3.3 percent
Expense ratio: 0.06 percent
With a well-diversified portfolio of stocks from every major sector of the economy, the Vanguard S&P 500 tracks its namesake index and offers a strong, long-term record of performance. Also, a low expense ratio won’t take away much of your returns, which averaged almost 14 percent annually over the last decade.
Yield: 1.6 percent
Expense ratio: 0.03 percent
Yes, a bond fund makes its appearance here, not because it’s going to provide stellar returns, but because it can fill a niche in your portfolio when you need a good, safe place to park cash. With investments in very short-term U.S. Treasury bills, this ETF will shrug off rising rates (unlike funds in longer-dated bonds), and its yield – which is non-existent right now – will shift higher as rates move up. This fund is backed by the U.S. government, so it’s about as safe as bonds get.
Yield: 1.4 percent
Expense ratio: 0.12 percent
This Invesco ETF often hits Bankrate’s list of best small-cap ETFs due to its attractive long-term performance, which has averaged more than 14 percent over the last decade. The fund invests in the stocks that comprise the S&P 600 High Momentum Value Index, a group of 120 value-priced small stocks that show strong price momentum.
Yield: 1.2 percent
Expense ratio: 0.39 percent
If you want concentrated exposure to financial companies in the S&P 500, you can do that with the Financial Select Sector SPDR Fund. It offers exposure to not just banks but companies in diversified financial services, capital markets, insurance and consumer finance, among others. The low expense ratio, exposure to larger financial players and annual returns above 13 percent over the last decade give you reasons to consider this narrowly diversified ETF.
Yield: 2.0 percent
Expense ratio: 0.10 percent
The Vanguard High Dividend Yield ETF tracks the performance of the FTSE High Dividend Yield Index, which includes hundreds of larger companies. This ETF pays a substantial yield, and with about 20 percent of the fund invested in financial services companies, rising rates may offer an extra tailwind to this portion of the portfolio.
Yield: 3.0 percent
Expense ratio: 0.06 percent
Whether you go with one or more of these ETFs or another entirely, it’s important to remember that investing in stocks requires you to invest long term, at least three to five years out. With that kind of time frame, you can ride out the volatility in the market and potentially enjoy some of the attractive long-term returns that stocks can offer.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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