The Fed’s accelerating rate hikes are causing big moves in financial markets, but there are some exchange traded funds that may help investors protect their portfolios or even profit. The Fed hiked its benchmark interest rate by 75 basis points on Wednesday, its biggest increase since 1994. Treasury yields moved higher in the immediate aftermath of the news, adding to large increases over the past week. Yields move in the opposite direction of the price of bonds, so one of the simples strategies to benefit from rising rates is to bet against bond prices. There are several funds from ProShares that do just that by shorting segments of the U.S. Treasury market. Year to date, that has been a winning strategy. The ProShares Short 20+ Year Treasury ETF (TBF) is up about 31%, and the ProShares Short 7-10 Year Treasury ETF (TBX) has gained 14%. There are other debt product funds that focus on flexible or floating rates, which adjust with market rates. The iShares Floating Rate Bond ETF (FLOT) , Franklin Liberty Senior Loan ETF (FLBL) and SPDR Blackstone Senior Loan ETF (SRLN) are all negative year to date, but they’ve performed much better than the S & P 500. One issue for investors is that rates are rising at the same time as recession concerns are growing. While Treasurys are seen as largely risk free, floating rate products for corporate debt could sell off if investors become worried about the ability of companies to make their payments. The same concern can extend to equity-focused funds that may, in theory, benefit from higher rates. Bank stocks, for example, can sometimes rise with rates because they can lead to higher net interest margins. However, economic growth concerns and the threat of delinquent loans tend to be major headwind for cyclical bank stocks. The Financial Sector Select SPDR Fund (XLF) is down more than 18% year to date, as the rise in rates has been more than offset by concerns about possible loan losses or a slower economy. There are also funds that provide more customized exposure to fixed income. One new fund that has attracted a lot of inflows this year is the FolioBeyond Rising Rates ETF (RISR) . The fund primarily invests in interest-only products tied to mortgage backed securities. When mortgage rates rise, prepayments of mortgages decline, enhancing the value of these interest-only products. A major rise in defaults, however, could lead to those interest payments not being made. The FolioBeyond fund, which launched late last year, now has more than $120 million in assets under management and is up roughly 35% year to date.
