The Federal Reserve has hiked interest rates sharply throughout 2022 to curb high inflation. After spending much of 2020 and 2021 in a zero-rate environment, investors have grown accustomed to a very helpful Fed, determined to help the economy through the pandemic. But now, with the economy stronger and inflation raging, the country’s central bank is slamming the brakes, making it harder for stock investors and others.
So how do investors continue to invest in this environment, and how do they use ETFs to invest? Here are some of the best ETFs for investors who want to protect themselves and even thrive in the face of rising interest rates.
Which types of ETFs tend to perform well when interest rates rise?
With interest rates rising, likely for years, investors are looking for the best industries and investments to thrive in this environment. Types of investments that tend to perform well when interest rates rise include:
- Banks and other financial institutions. When interest rates rise, banks can charge higher rates on their mortgages while raising the price they pay for deposits. (That’s one reason to focus on finding high-yield online savings accounts.)
- Value stocks. Stocks that trade at relative discounts tend to perform better when interest rates rise and investors stay away from “higher growth” or riskier stocks.
- Dividend stocks. Dividend-paying companies also appear to be bouncing back as interest rates rise, and many also tend to be value stocks.
- S&P 500 Index. When the market price in higher interest rates, stocks usually fall first, but it’s important to remember that interest rates usually rise because the economy is resilient and companies are doing well. Therefore, if interest rates rise, diversified stocks may also rise.
- Short-term government bonds. Yes, rising interest rates hurt bonds, but very short-term bonds suffer very little negatively, and when interest rates rise, so do yields on newly issued bonds. Combine that with government support and you’ll have an investment as safe as you’ve found.
While stocks may offer the greatest upside potential over time, investors sometimes need the safety of bonds — yes, even with rising interest rates. That’s why it’s important to have a bond ETF you can trust with little loss and the potential for annual returns.
Best ETFs for High Interest Rates
The ETFs listed below fall into the categories above and also offer low expense ratios to help you minimize your out-of-pocket expenses. (Data as of August 1, 2022.)
1. Schwab U.S. Dividend Stock ETF (SCHD)
This ETF tracks the total return of the U.S. Dow Jones index. Dividend 100 index, consisting mostly of large U.S. companies. The dividend yield is at the high end of the scale, and the long-term track record — growing nearly 14% annually for the 10 years to August 2022 — suggests the ETF will continue to perform well.
Yield: 3.3%
Expense ratio: 0.06%
2. Financial Select Sector SPDR Fund (XLF)
If you want to focus on investing in financial companies in the S&P 500, you can do so with the Financial Select Sector SPDR Fund. It serves not only banks but also companies in diversified financial services, capital markets, insurance and consumer finance. A low expense ratio over the past decade, exposure to large financial players, and annual returns of over 13% give you reason to consider this diversified ETF.
Yield: 2.0%
Expense ratio: 0.10%
3. Vanguard Value ETF (VTV)
The Vanguard Value ETF tracks the performance of the CRSP U.S. Large Cap Value Index, a group of large companies that trade at a relative discount. With a very low expense ratio, a strong long-term balance sheet and a financial exposure of about 20%, the fund should perform well in an environment of rising interest rates.
Yield: 2.5%
Expense ratio: 0.04%
4. Goldman Sachs Access Treasury 0-1 Year ETF (GBIL)
Yes, the bond fund is here, not because it will deliver great returns, but because it can fill a niche in your portfolio when you need a nice and safe place to store your cash. By investing in very short-term U.S. Treasuries, the ETF will be shielded from rising interest rates (unlike long-term bond funds), and its yield (which does not currently exist) will move higher as interest rates rise. The fund is backed by the U.S. government, so it’s as safe as bonds.
Yield: 1.4%
Expense ratio: 0.12%
5. Invesco S&P SmallCap Value with Momentum ETF (XSVM)
This Invesco ETF is regularly featured on Bankrate’s list of best small-cap ETFs for its attractive long-term performance, averaging over 14% over the past decade. The fund invests in the stocks that make up the S&P 600 High Momentum Value Index, which consists of 120 cheap small-cap stocks that exhibit strong price momentum.
Yield: 1.2%
Expense ratio: 0.39%
6. Vanguard S&P 500 ETF (VOO)
Featuring a diversified portfolio of stocks covering all major sectors of the economy, the Vanguard S&P 500 tracks its namesake index and offers a strong long-term track record. Also, a lower expense ratio won’t affect your returns that much, which has averaged close to 14% per year over the past decade.
Yield: 1.6%
Expense ratio: 0.03%
7. Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF tracks the performance of the FTSE High Dividend Yield Index, which includes hundreds of large companies. This ETF has delivered solid returns, and since about 20% of the fund is invested in financial services companies, rising interest rates can provide an additional tailwind to this part of the portfolio.
Yield: 3.0%
Expense ratio: 0.06%
Điểm mấu chốt
Whether you decide to invest in one or more of these ETFs, or something else entirely, it’s important to remember that when investing in stocks, you need to invest for the long term, at least three to five years in advance. With a time frame like this, you can weather market volatility and potentially enjoy some of the attractive long-term returns that stocks can offer.
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