Steve Mauzy: When a new class of investments hits the market I prefer to remain on the sidelines and watch from a distance.
In the past year, the market has been hit with new income funds that purportedly protect investors’ principal against the ravages of rising interest rates. Called “Rising Rate” ETFs, these funds focus on short-term bonds, or employ derivatives and shorting strategies.
The Wall Street Journal reports that 17 of these rising rate ETFs have been launched or have filed plans to launch in the past six months. The funds already on the market have attracted $430 million from investors. That dollar amount is sure to rise.
I understand the attraction: Many investors want non-equity income alternatives. They want the security of income and principal that a quality bond provides. They also want principal protection should interest rates rise.
The following bond ETFs offer that protection, but for a price.
Investing in a portfolio of short-maturity bonds will limit principal loss if interest rates rise, but investors sacrifice income for safety. The Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) yields 1.8%, while the iShares Short Maturity Bond ETF (BATS:NEAR) yields less than 1%. The elusive free lunch has yet to be found.
ProShares Investment Grade-Interest Rate Hedged ETF (BATS:IGHG) is another principal protector. The fund employs a sophisticated strategy of buying corporate bonds while selling short U.S. Treasury securities of similar duration. This strategy dampens interest-rate fluctuations in return for a yield that fails to reach 1%.
Investors convinced interest rates are on the rise who want to maximize their return should consider ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF). The fund correlates positively with the yield on the 20-year U.S. Treasury bond. If the yield on the 20-year bond rises, so does the value of the ETF. Again, income is the glaring shortcoming; there isn’t any.
Here’s something else income investors should consider: interest rates won’t rise.