The brokerage firms are starting to release their outlooks for
2014 and the predictions of what will happen with everything from
stock prices to interest rates.
When it comes to interest rates the overwhelming consensus is
that rates will increase in 2014 as the Fed begins to taper its
$85 billion per month asset purchases.
This should not be a big surprise to anyone that follows the
market as interest rates have already increased dramatically from
the 2013 low hit in May. The yield on the U.S. 10-year Treasury
bond is currently 2.79 percent, up from a low of 1.62 percent on
the first day of May. While the rally in the yield has been
significant, historically speaking, the interest rate could
continue to rise dramatically in the coming year.
New Internet Boom via ETFs (FDN, SOCL, GOOG, FB,
Before the 2007 financial bubble the yield on the 10-year was
above 5.1 percent. If yields retest the pre-recession highs it
could be a tough year for owners of bond ETFs.
As the interest rate on a bond increases, the value of the
underlying bond falls in value. This is why shares of the iShares
Barclays 20+ Year Treasury Bond ETF (NYSE:
) are down 16 percent from its May high. Investors that have
always considered bonds as the "safe haven" better think
The ProShares High Yield-Interest Rate Hedged ETF (NYSE: HYHG)
is an option for investors that continue to demand high income
and at the same time are concerned about rising interest rates.
The ETF consists of a diversified portfolio of high yield
corporate bonds as well short positions in U.S. Treasury futures.
The built-in interest rate hedge is created with the short
position that will increase in value if interest rates rise and
Treasury prices fall in value.
Since its inception on May 21, 2013, the ETF has gained 2.3
percent including the dividends that vary from month to month.
During the same time frame, TLT has lost 10.2 percent, including
The ETF charges an annual net expense ratio of 0.50 percent
and the current SEC 30-day yield is 4.92 percent.
With the near certainty of higher interest rates in the next
year, barring any black swan events, it would be in the best
interest of investors to begin looking at hedging options.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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