Best Mutual Funds For Rising Interest Rates


The Vicious Cycle: Rising Inflation Interest Rates And Bond Yields

How rising interest rates affect your investments

Due to the Russia-Ukraine war, commodity prices show no signs of abatement and inflation continues to remain elevated. Inflation is likely to remain above RBIs current target in the near future. That is why the central bank has increased interest rates to control inflation. This has worried the bond market. And the bond yields shot up above 7.4%.

Rising bond yields have an impact on both debt and equity markets. Lets understand how.

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Best Etfs For Rising Interest Rates

  • Exchange-Traded Funds

With its first interest rate increase in years, the Federal Reserve appears set to move ahead with its plan to continue boosting rates several more times through the end of the year. After going through much of 2020 and 2021 in a zero-rate environment, investors got comfy with a very accommodative Fed, which floored the gas pedal to help the economy through the pandemic. But now with a much stronger economy and raging inflation, the nations central bank is hitting the brakes, making things harder for stock investors and others.

7 ETFs to watch

Schwab US Dividend Equity ETF SCHD
Vanguard S& P 500 ETF VOO
Goldman Sachs Access Treasury 0-1 Year ETF GBIL
Invesco S& P SmallCap Value with Momentum ETF XSVM
Financial Select Sector SPDR Fund XLF
Vanguard High Dividend Yield ETF VYM

So how do investors continue to invest in this climate and how can they use ETFs to do it? Here are some of the best ETFs for investors looking to defend, and even thrive, amid rising rates.

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Home Loans: Lock In Fixed Rates Now

Mortgage rates have been rising over the past year, jumping more than three percentage points.

The 30-year fixed-rate mortgage averaged 6.02% in the week ending September 15, up from 5.89% the week before, according to Freddie Mac. That is more than double what it was in mid-September of last year , and notably higher than where it started this year .

And mortgage rates may climb even further.

So if youre close to buying a home or refinancing one, lock in the lowest fixed rate available to you as soon as possible.

That said, dont jump into a large purchase that isnt right for you just because interest rates might go up. Rushing into the purchase of a big-ticket item like a house or car that doesnt fit in your budget is a recipe for trouble, regardless of what interest rates do in the future, said Texas-based certified financial planner Lacy Rogers.

If youre already a homeowner with a variable-rate home equity line of credit, and you used part of it to do a home improvement project, McBride recommends asking your lender if its possible to fix the rate on your outstanding balance, effectively creating a fixed-rate home equity loan. Say you have a $50,000 line of credit but only used $20,000 for a renovation. You would ask to have a fixed rate applied to the $20,000.

If thats not possible, consider paying off that balance by taking out a HELOC with another lender at a lower promotional rate, McBride suggested.

Mutual Funds: Invesco Rochester Municipal Opportunities Fund

Get Ready For A Big, Fast Rise In Interest Rates

Along with BGHAX, ORNAX was another of the bond mutual funds recommended by Barrons as a buy ahead of rate increases. The Invesco managed fund, as you can tell from its name, invests in municipal bond. Specifically, lower-rated municipal bonds. With these lower credit ratings of course comes higher yields.

The fund holds a diverse portfolio of state and local-level municipal debt securities. These include bonds issued by California, New York City, and San Francisco. Its list of top holdings also includes tobacco settlement bonds issued by California and the District of Columbia.

At todays NAV , the Municipal Opportunities Fund has a trailing twelve month yield of 4.32%. Sure, that may not sound like high yield, at a time of more than 6% inflation. Yet keep in mind that muni bonds are exempt from federal income taxes. Depending on your tax bracket, its after-tax yield may be higher than with taxable corporate bonds.

Also, its higher yield may reduce further downside, as bonds and bond funds continue to sell-off in the face of rising rates. With its municipal bond focus, and its potential to perform better than investment-grade bond funds in 2022, investors focused on income rather than capital growth may want to consider buying ORNAX.

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Best Stocks And Sectors For Rising Interest Rates

What are the best investments when interest rates are rising? Market timing is tricky at any point in time. However, there are some smart moves you can make to invest in the best stock funds and sectors in a rising interest rate environment.

When interest rates are at or near historical lows, it may be wise to prepare for when rates rise. This is often followed by a final move upward for stocks before a decline ensues. The economy may be fairly healthy when rates begin rising, but rising rates often signal the start of the end of an economic cycle.

One balanced approach when interest rates are rising is to stay invested and take advantage of late-stage positive momentum, but you should also prepare for harder times that are lurking around the corner. Take a look at the best stock funds and stock sectors when interest rates go up.

Rising Interest Rates And Bond Funds: What You Need To Know

  • Federal Reserve is aggressively hiking rates.
  • The implications for bonds, bond funds, and bond investors are massive.
  • An overview of these follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »


Skyrocketing inflation has led to several aggressive Federal Reserve interest rate hikes these past few months, with more on the way. Several readers and subscribers have asked me for my thoughts on said hikes, and for their implications for bond funds and bond investors. I’ll be covering these topics in this article, focusing on the implications for high-yield corporate bond funds.

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Best Bond Funds 201: Municipal Bonds

Municipal bonds were among the few asset classes that ended 2018 in the black. The Bloomberg Barclays Municipal index gained 1.28%. Its average annual return for the past 10 years was 4.85%.

While the number of award winners was about half of those from the prior year , some outshined their peers with impressive returns. Oppenheimer funds not only dominate the top five with three funds, but eight are among the top 14 award winners. All are newcomers to the list.

The top fund is $6.4 billion Oppenheimer Rochester High Yield Municipal , sporting a whopping 9.14% return last year and a 10-year average annual return 10.96%. Another star and repeat from last year is $17.7 billion Nuveen High Yield Municipal , with returns of 2% and an average annual 10.77% for those periods.

“These funds benefited from overall credit-spread tightening in the municipal market and outperformance of credits issued by the Commonwealth of Puerto Rico,” Oppenheimer’s Rochester muni team told IBD.

Impact Of Rising Rates On The Fixed

The Mutual Fund Show: Impact Of Potential Rising Interest Rates On Debt MF Investors

Check out the questions that you should ask your target-date fund provider.

Different types of bonds, however, behave differently. High-quality bonds such as U.S. Treasury and investment-grade corporate bonds and long-term bonds tend to be more interest-rate sensitive. These effects can be at least partially offset by holding a wide variety of bond types.

  • Emerging market bonds Securities from emerging nations tend to have low correlations with developed country bonds and can provide diversification benefits.
  • Floating rate bonds These notes usually are minimally affected by interest rate movements since their rates are automatically adjusted to reflect the current environment.
  • High-yield bonds These bonds are issued by companies that are financially distressed. Their value tends to be impacted more by the health of the issuer than the direction of interest rates.

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The 7 Best Etfs And Mutual Funds To Prepare For Higher Rates

With interest rates on the move higher, these ETFs and mutual funds can be market leaders.

Interest rates are on the rise right now, and this is beginning to spook investors. Is there anything to be concerned about? Well, when the herd begins to move, you dont exactly want to stand in its way. In translation, now is a good time to start preparing for higher rates with the right kind of exchange-traded funds and mutual funds.

The yield on the 10-year Treasury bond recently broke above 1.75%, a 14-month high for this benchmark rate. Why is this a problem? Investors dont like it because, when yields on low-risk bonds begin to approach the yields for dividend-paying stocks, they begin to rotate their holdings over to the perceived safety of bonds, while receiving the same yields.

And for those investors who dont care about yield, they still care about avoiding downside price risk caused by herd selling. But for those of us investors who dont mind taking a moderate degree of risk, there are ETFs and mutual funds that can hold up in a rising rate environment.

Thus, in no particular order, here are seven ETFs and mutual funds for rising interest rates.

  • Vanguard Short-Term Inflation Protected Securities
  • iShares Floating Rate Bond ETF
  • Vanguard Financials Index Fund ETF Shares
  • Dodge & Cox Stock Fund
  • Vanguard Real Estate ETF
  • Parnassus Endeavor Fund Investor Shares
  • SPDR Gold Shares

Now, lets dive in and take a closer look at each one.

Best Etfs For Higher Interest Rates

The ETFs included below hail from the categories above, and they also offer a low expense ratio, helping you to minimize your out-of-pocket costs.

1. Vanguard Value ETF

The Vanguard Value ETF tracks the performance of the CRSP US Large Cap Value Index, a collection of big companies trading at relative discounts. With a rock-bottom expense ratio, a strong long-term record and about 20 percent exposure to financials, this fund should perform well in a rising-rate environment.

Yield: 2.2 percent

Expense ratio: 0.04 percent

2. Schwab US Dividend Equity ETF

This ETF tracks the total return of the Dow Jones U.S. Dividend 100 Index, which consists mainly of large American companies. The dividend yield sits on the high end of the scale, while the long-term track record better than 14 percent gains annually in the 10 years to March 2022 suggests this ETF will continue to perform well.

Yield: 2.9 percent

Expense ratio: 0.06 percent

3. Vanguard S& P 500 ETF

With a well-diversified portfolio of stocks from every major sector of the economy, the Vanguard S& P 500 tracks its namesake index and offers a strong, long-term record of performance. Also, a low expense ratio wont take away much of your returns, which averaged better than 14 percent annually over the last decade.

Yield: 1.3 percent

Expense ratio: 0.03 percent

4. Goldman Sachs Access Treasury 0-1 Year ETF

Yield: 0 percent

Expense ratio: 0.12 percent

5. Invesco S& P SmallCap Value with Momentum ETF

Yield: 1.2 percent

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Brandywine Global High Yield Fund

Worried about what rising rates will do to bond mutual funds? Late last month, Barrons tackled this question, offering some ideas of better plays as rates rise. Brandywine Global High Yield Fund was one of the names it recommended.

One of the main reasons for this pick was the shorter-than-average duration of its portfolio. Focusing on short-duration can mitigate some of the interest rate risk with fixed-income funds right now. So too, can focusing on funds with higher-yielding securities. BGHAX has you covered in that regard as well.

With 85.75% of its assets invested in high-yield corporate bonds, the fund owns debt securities from a wide variety of issuers, including Dish Network , Mohegan Gaming & Entertainment, and Realogy . At todays NAV , this fund, managed by Franklin Resources , sports a 4.65% distribution rate.

Last year, the Brandywine Global High Yield fund outperformed its main benchmark . Already experiencing a selloff, once the Fed made it known that it planned to raise rates, this may make a great choice for income-focused investors. For them, it offers above-average yield. At the same time the risk of more capital losses may be minimal, compared to funds holding investment-grade debt securities.

Vanguard Equity Income Fund

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Above, weve talked about how value and high-yield could hold up as rates rise. But in terms of sectors, one that could perform well as the Fed changes policies is the financial sector. Banks, insurance companies, and other financial institutions have been challenged over the past few years by super-low interest rates.

Yet as interest rates get it on the long road back to what you could consider normal levels? In turn, financials may deliver stronger earnings in the quarters ahead. Among mutual funds, you have many options for adding exposure to financials to your portfolio. One of the best ones is TheVanguard Groups Equity Income Fund.

Sure, VEIPX is not specifically a financials-focused fund. Its a large-cap value fund. However, while top holdings in its portfolio include healthcare plays like Johnson & Johnson , and consumer staples stocks like Procter & Gamble , around 21.7% of the portfolio is invested in financials. This includes positions in JPMorgan Chase, Bank of America , and Morgan Stanley .

Featuring a low expense ratio , as is standard with Vanguard, the fund also has a trailing-twelve month yield of 2.35%. Underperforming the overall stock market in 2021, it could outperform it during 2022.

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Mutual Fund Investment Strategy: How To Benefit From Rising Interest Rate Regime

2 min read.Asit Manohar

  • Mutual fund investment strategy: Debt funds may yield 0.50 per cent to 1.0 per cent higher from its average annual return in next 6 months to two years, believe tax and investment experts
Listen to this article

Mutual fund investment strategy: Amid hawkish Reserve Bank of India on interest rate hike, mutual fund investors are busy guessing about its impact on their return. According to tax and investment experts, such rate hike regime may impact equity mutual funds return in short term period, say 6 months to two years. However, for long term equity mutual fund investors, it won’t have much impact on their return as markets would pare its losses in medium to long term. Experts said that short term investors, who have time horizon for 6 months to two years, should invest in debt mutual funds, especially in liquid, money market and bond funds. They said that such funds are expected to generate 0.50 to 1 per cent more from their current annual average return.

Best Stock Funds For Rising Interest Rates

If you choose to invest in mutual funds when rates are rising, you have to know which mutual fund categories can work for you.

One such type is growth stock funds. These mutual funds are focused on growth stocks, which have strong projected growth and attractive return on equity. The best time to invest in growth stocks is usually when times are good, during the latter stages of an economic cycle.

Times of rapid growth often occur at the same time as rising interest rates. Momentum investing takes advantage of this. For instance, in 2007, the economy was growing rapidly, and most market indexes had reached all-time highs. It was at that time that growth stocks dominated across all capitalizationslarge-cap stocks, mid-cap stocks, and small-cap stocks. Note that 2007 was the year prior to the Great Recession of 2008, which ended the cycle.

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Rising Interest Rates: Good Or Bad For Stocks

The question of what happens to stocks when interest rates rise is straightforward, but a single, definitive answer is certainly more elusive. Other factors such as individual company performance and the type of industry can have a significant impact on how some stocks will react. The degree and timing of rate increases as well as investors expectations also play a role in driving the stock markets reaction to increasing rates.

The Federal Reserve typically raises rates in periods of stronger economic activity, which is when stocks are also doing well. To help control resulting inflation, the rate that the Federal Reserve targets is the federal funds rate, which is the interest rate that banks charge each other for overnight loans. This short-term borrowing/lending is done to satisfy the minimum reserve requirements that banks have to keep on hand, and it impacts the pricing of other loans. If the Fed is raising the rate, the goal is to push the cost of borrowing higher and make it more expensive to buy larger ticket items like homes or cars or even operate a business and thereby slow down economic growth .

Rising Interest Rates And How You Can Help Your Clients

Equities or bonds? Where to invest in a rising interest rate scenario

Chris TidmoreSenior Manager Investment Advisory Research Center

Soaring inflation. Rising rates. Market volatility. Your clients are most likely calling you with every headline looking for your guidance on how to adjust, if at all, their portfolio strategies. As you know, the Federal Reserve has commenced an anticipated series of interest rate hikes to stem inflation, and the effects are starting to reverberate throughout financial markets.

So what are the kinds of portfolio management strategies for responding not only to the rocky, recent past quarter, but also to the prospect of a rising-rates environment over the next cycle? The fixed income allocation of your clients’ portfolios is a good place to startpicking up our previous analysis of the historically poor bond performance in the first quarter of 2022.

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