Interest rate hikes are always a concern for investors as they can lead to significant fluctuations in bond prices. Therefore, many investors are looking for ways to mitigate the impact of these hikes on their portfolios. In this article, we discuss two bond ETF strategies that can help investors to protect their portfolios during periods of interest rate hikes.
Strategy 1: Go Short
Joanna Gallegos, the co-founder of fixed-income ETF issuer BondBloxx, suggests that investors move towards the shorter end of the yield curve to mitigate the impact of interest rate hikes. Gallegos, who has previously served as the head of global ETF strategy for JPMorgan, believes that this is a sound approach given the current market conditions.
Gallegos predicts that the Federal Reserve will raise rates by another 100 basis points in the coming months. As interest rates go up, investors become uncertain about what will happen to bond prices in the long term. Therefore, by investing in shorter duration bonds, investors can limit the price risk associated with longer–term bonds.
Strategy 2: Barbell Approach
While Gallegos recommends shorter duration bonds, Main Management CEO Kim Arthur suggests using long-term bonds as part of a barbell strategy. Arthur believes that long-term bonds can provide a valuable hedge against a recession, and therefore, can be used as a portion of an investor’s allocation.
Arthur advises that long-term bonds should not constitute the entire portfolio, as equities tend to outperform fixed income over the long term. However, by investing in long-term bonds, investors can receive an inflation hedge that can protect their portfolios in the event of a market downturn.
Is the 60/40 Stock/Bond Ratio Dead?
Gallegos states that the traditional 60/40 stock/bond ratio is no longer effective in today’s market environment. She notes that the Fed has increased rates by 425 basis points in the past year, causing a significant shift in yields. As of Friday’s close, the US 10 Year Treasury was yielding around 3.7%, an 84% surge from one year ago. Meanwhile, the US 6 Month Treasury yield was around 5.14%, which reflects a one-year jump of 589%.
Interest rate hikes can lead to significant volatility in bond prices, which can negatively impact an investor’s portfolio. By using a combination of short-term and long-term bonds, investors can mitigate the impact of these hikes and protect their portfolios. As always, it’s important to consult with a financial advisor before making any investment decisions.