ETFs For Higher Rates And Inflation

The Constitution allows a long lag time between the election and the inauguration of a new president. Financial markets have no such patience. The prospect of higher infrastructure and defense spending coupled with tax cuts, promised by the incoming administration, pushed interest rates and stock prices higher soon after the election results were in.

Now it’s debatable whether the increase in government debt necessitated by the new president’s policies will actually produce robust economic growth or simply spur inflation. Financing, at least at the outset, will require new bond issues. That jolt of new supply alone is bound to impact the prices of outstanding issues, especially if the new coupons are relatively high.

Further pressure on bond prices can be expected if inflation is kicked up a notch or two, a likelihood if trade protectionism and immigration restriction, both goals of the new president, crimp the supply of goods and labor. 

So what can investors do to gird themselves for the possibility of lower bond prices (read: higher interest rates) and inflation? There are several exchange traded funds (ETFs) that can be used for portfolio tweaking. The ones listed below have fared best this year.

Interest rate hedges 

The ProShares Short 20+ Year Treasury ETF (NYSE Arca: TBF) offers daily unlevered and inverse exposure to an index tracking the performance of U.S. Treasury securities with more than 20 years left to maturity. The fund uses swaps and futures to yield a modified duration of -17.7 years, making this investment exquisitely sensitive to rate wobbles at the long end of the yield curve.

Technically, duration represents the number of years required to recover a security’s true cost, counting the present value of all coupons and principal. More simplistically, it’s a measure of interest rate sensitivity. For TBF, the number tells us that a 1 percent hike in the reference 20+ year rate would be expected to produce a 17.7 percent hike in the fund’s net asset value.

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DisclosureBrad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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