Donald J. Trump will take office as the 45th president of the United States soon. But the financial markets aren’t waiting around to render judgments on what his victory will mean for stocks, bonds, commodities, currencies, the economy, and your personal finances.
One of the most important side effects of Trump’s election can be seen in the bond market.
Bonds of all types … from Treasuries to municipals to emerging market debts to corporate securities … are plunging in value.
Since interest rates move in the opposite direction of bond prices, they’re surging across the board.
So what can you do to fight back? What investments and investment strategies make sense in this new, rising-rate environment?
- Stick with highly rated, fundamentally strong stocks that can grow their dividends – Rising rates are bad news for many stocks that get lumped into the category of “bond alternatives.” That includes REITs, utilities, lower-growth telecommunications companies, and the like.
But even in sectors like telecom and utilities, there are companies that can sustainably grow their dividends thanks to rising sales and earnings.
And outside of those sectors, there are some stocks that feature the right combination of high Weiss Ratings and strong fundamentals, as well as less exposure to the turn in the credit cycle, which I’ve discussed for many months. It’s those “A” and “B” rated names that you can (and should) focus on.
Floating-rate funds – In the bond world, you can now find an increasing number of ETFs that allow you to invest in floating-rate bonds.
As the name suggests, these are corporate bonds whose coupon payments adjust higher when benchmark short-term rates rise. You still have credit risk, because corporate borrowers can default. But you’re heavily protected against interest-rate risk.
One example would be the iShares Floating Rate Bond ETF (FLOT). It has assets of $3.5 billion, and sports an effective duration of just 0.14 years.
Duration is a measure of interest rate risk; the higher the number, the more money you’ll lose as rates rise, and vice versa. It’s that low duration figure that will keep you safe even in this post-Trump world.
- Interest-rate hedged funds – We’re also seeing more ETFs that use interest rate derivatives and futures to eliminate as much rate risk as possible. For instance, the ProShares Investment Grade – Interest Rate Hedged ETF (IGHG) is a $136 million fund that “shorts” Treasury futures to hedge out rate risk. That allows you to profit from corporate bonds without worrying that rising rates will torpedo your portfolio.
- Short-term/low-duration funds – Rather than own long-term munis, Treasuries that don’t mature for several years, REITs, or other vulnerable income-generating investments, you can also just stick with ETFs or funds that own short-term, low-duration debt. Case in point: The iShares 1-3 Year Treasury Bond ETF (SHY) is much safer in a rising-rate environment than the TLT because it owns 1-to-3-year debt, rather than bonds that mature in 20 or more years.
Of course, this is just a partial list of strategies. I have many, many more in my toolbox, seeing as I’ve spent the last couple of decades focusing on the interest rate markets and shifts in the credit cycle.
You can find recommendations for your core, long-term funds, Or for your more aggressive money, including funds you can afford to risk in search of higher returns, check out my active investing service All Weather Trader. I recommend all kinds of positions designed to profit in a rising-rate world there.
Until next time,
Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.