Predicting monetary policy is difficult and it prove to be a fool’s errand even for the experts. This year could prove to be a case study in that phenomenon.
Entering 2023, plenty of market observers speculated the course of Federal Reserve action would be a few – probably not more than three – interest rate hikes of not more than 25 basis points apiece through the first several months of the years. Then the central bank would relent and perhaps examine rate cuts at some point in 2024.
That outlook could ultimately prove accurate, but investors need to prepare for the fact that it won’t. In fact, signs are mounting that the Fed may have no choice but to be more aggressive than expected with monetary policy this year.
Fortunately for investors, there are avenues for surviving and thriving while Treasury yields climb and some of the following ETFs could be ideal elixirs for an extended period of rising rates.
VanEck Morningstar SMID Moat ETF (SMOT)
The VanEck Morningstar SMID Moat ETF (SMOT) has several advantages that bolster its credentials as a rising rates ETF, including the point that wide moat companies have penchants for proving somewhat durable during eras of tighter monetary policy.
Add to that, mid- and small-cap companies, broadly speaking, are usually less vulnerable to a stronger dollar than large-cap counterparts because smaller firms are less export dependent. That’s something to consider because SMOT holds both mid- and small-cap equities and also because a stronger dollar is often a predictable of rising rates. Enhancing the allure of SMOT today is the point that smaller stocks are deeply discounted on a historical basis.
“Despite a long history of outperformance versus large–caps, valuations for SMID–cap companies have taken a noticeable haircut relative to large–caps over the past few years,” according to VanEck research. “SMID cap valuations began to diverge back in 2018 and then saw further discounts at the beginning of 2021. Driving forces behind the widening discount during this period include the aging of the previous record–setting bull market, growing concentration within the equity market in mega–cap companies, and different sector compositions of the U.S. large and small–mid cap indices.”
VanEck Mortgage REIT Income ETF (MORT)
The VanEck Mortgage REIT Income ETF (MORT) is a high-yield fund as highlighted by a 30-day SEC yield of 12.12%. While that implies sensitivity to rising rates, the worst of that vulnerability may be behind the ETF as it is higher by 12% year-to-date.
That yield is down 325 basis points in about three months, indicating some investors are buying into the rebound thesis for mortgage real estate investment trusts (mREITs) – the asset class represented by MORT. MORT, which follows the MVIS US Mortgage REITs Index, is home to 26 of those names with its top two holdings commanding more than 21% of the ETF’s roster.
“High MBS yields are beginning to attract interest from investors in other sectors of the credit markets, such as corporates,” reports Randall Forsyth for Barron’s. “For individual investors with a strong stomach for speculation, beaten-down real estate investment trusts with leveraged mortgage portfolios offer eye-popping yields as high as 20%. There also is a less-risky alternative to mortgage REITs (mREITs), with lower but still-generous yields in the 8%-11% range.”
Franklin Senior Loan ETF (FLBL)
The Franklin Senior Loan ETF (FLBL) stands as a credible addition to the rising rates ETF list because senior loans, also known as bank loans or leveraged loans, having floating rate components, making them less sensitive to rising rates than fixed-rate bonds.
Actively managed, FLBL attempts to beat the widely followed S&P/LSTA U.S. Leveraged Loan 100 Index. Owing to potential credit and liquidity issues, senior loans represent an asset class in which active management can be beneficial to investors and FLBL’s managers have been at for 25 years.
Investors can access those benefits with another notable perk: A 30-day SEC yield of 8.49%, as of the end of January.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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