High Rates to Stay? Secure Your Portfolio With These ETFs

Yashwardhan Jain

27 June 2024 at 5:06 pm·4-min read

Michelle Bowman, Federal Reserve Governor, as quoted on Fox Business, expects interest rates to remain unchanged, foreseeing no interest rate cuts in 2024.

Viewed as one of the most hawkish American central bankers, Bowman mentions that she remains open to hiking rates given persisting unfavorable inflation data. Taking a cautious tone regarding reducing interest rates early, Bowman stated that it could risk reigniting high inflation, calling for further rate hikes.

However, investors anticipate two rate cuts by the end of this year. According to the CME FedWatch Tool, there is a 56.3% likelihood of the Fed going with a rate cut in September. However, the probability of a rate cut in September does seem to fluctuate, reflecting skepticism and uncertainty about the possibility of two interest rate cuts this year.

Uncertain Inflation Levels Support the View

The consumer price index for May eased slightly to 3.3%, from April’s 3.4%, providing some relief to investors. Despite recent signs of moderating inflation, policymakers still lack confidence in its stability.

However, Bowman estimates that inflation will stay high for a while. Adopting a cautious approach regarding inflation levels and interest rates might be better than taking an aggressive approach with rate cuts.

Keeping the interest rates high for a longer period will be preferable to reducing interest rates prematurely and potentially triggering an unexpected rise in inflation levels. Canada, according to Forbes, recently lowered rates for the first time since 2020, only to see inflation unexpectedly rise to 2.9%, well above economists' forecasts of 2.6%.

Factors Keeping Rates High

High interest rates could be the new normal as increased global investments drive demand for borrowing, consequently fueling the need for higher interest rates.

As global investments increasingly prioritize climate control, interest rates may remain elevated due to the huge investment demand for transitioning to a green economy.

The rapid adoption of AI supports this view. While it enhances productivity and reduces costs, some economists suggest it could drive up borrowing demands due to high capital needs, potentially leading to higher interest rates. An increase in GDP due to AI adoption could also result in a rise in interest rates.

ETF Strategies to Consider

Given the current economic landscape and the uncertainty surrounding the future of interest rates, investors can take a cautious approach and increase their exposure to the following areas, which could be beneficial for their portfolios.

However, it is important to note that the market sentiment is tilting toward a rate cut later in the year. Increasing exposure to the following funds can help secure and strengthen portfolios if the Fed decides to keep the rates same or goes for a raise.

Value ETFs

Value stocks have a track of long-term outperformance and resilience against market trends. Characterized by solid fundamentals such as earnings, dividends, book value and cash flow, these stocks trade below their intrinsic value, representing undervaluation. They offer the potential for higher returns and lower volatility compared to growth and blend stocks.

Vanguard Value ETF (VTV) has gained 22.72% over the past year.

iShares Russell 1000 Value ETF (IWD) has gained 21.51% over the past year.

iShares S&P 500 Value ETF (IVE) has gained 23.81% over the past year.

Consumer Staples ETFs

Consumer staples are essential products like food, beverages, household items and hygiene products, including alcohol and tobacco. They are non-cyclical, with demand remaining consistent regardless of economic conditions.

Consumer Staples Select Sector SPDR Fund (XLP) has gained 9.50% over the past year.

Vanguard Consumer Staples ETF (VDC) has gained 11.53% over the past year.

iShares U.S. Consumer Staples ETF (IYK) has gained 5.82% over the past year.

Interest Rate Hedge ETFs

These funds offer a tactical hedge against potential interest rate increases, providing reassurance to investors during periods of market stress when interest rate volatility is high. This makes them an attractive investment option given the uncertain path of interest rates.

Simplify Interest Rate Hedge ETF (PFIX) has gained 43.08% over the past year.

Global X Interest Rate Hedge ETF (RATE) has gained 17.22% over the past year.

FolioBeyond Alternative Income and Interest Rate Hedge ETF (RISR) has gained 16.15% over the past year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

Global X Interest Rate Hedge ETF (RATE): ETF Research Reports

Vanguard Value ETF (VTV): ETF Research Reports

Vanguard Consumer Staples ETF (VDC): ETF Research Reports

iShares U.S. Consumer Staples ETF (IYK): ETF Research Reports

iShares Russell 1000 Value ETF (IWD): ETF Research Reports

iShares S&P 500 Value ETF (IVE): ETF Research Reports

Simplify Interest Rate Hedge ETF (PFIX): ETF Research Reports

FolioBeyond Alternative Income and Interest Rate Hedge ETF (RISR): ETF Research Reports

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