3 Best ETFs to Protect Against Interest Rate Rises
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The Bank of Canada (BoC) is bracing for a series of interest rate hikes in 2022. Policymakers felt the heat, as inflation in Canada hit a 30-year high of 4.8% in December 2021. The BoC is expected to have its next meeting on January 26, 2022. Investors should prepare for an upward move next week. Today I want to look at three exchange-traded funds (ETFs) you should hold in a tightening rate environment. Let’s go.
This bond ETF is a solid target if central banks continue to tighten rates
Bond yields rose sharply earlier this week, which boosted equity market volatility. Investors may want to target bond-focused ETFs as central banks target rate hikes. iShares Canadian Real Return Bond ETF (TSX: XRB) seeks to provide income by replicating the performance of the FTSE Canada Real Return Bond Index. Shares of this ETF fell 4.4% in 2022 in the early afternoon of January 21.
This ETF offers exposure to Canadian federal and provincial real return bonds. Additionally, it aims to provide a steady, inflation-adjusted stream of income. It is advertised as a low-risk option to hedge against inflation. The bulk of its holdings are made up of federal government bonds, while it is supplemented by bonds from the provincial governments of Ontario and Quebec.
Here’s another fund I’d hold as rates are set to rise
Mackenzie Floating Rate Income ETF (TSX:MFT) is another ETF worth considering ahead of the Bank of Canada’s planned rate hikes. It advertises higher income potential due to variable rate loans generally below investment grade and higher yields than conventional fixed income instruments. In addition, the profit margins of major lenders could increase if the benchmark interest rate rises. However, this ETF seems to be less vulnerable to interest rate fluctuations. Additionally, it aims to improve diversification, as floating rate loans are less correlated to higher quality conventional fixed income assets.
Shares of this ETF rose slightly over the year-over-year period. It is considered low to medium risk. This is an ETF worth targeting ahead of proposed increases in interest rates.
Why this bank-focused ETF could thrive in this environment
Investors should turn to the financial sector in an environment of tightening rates. Meanwhile, higher rates mean major financial institutions will see their profit margins rise. This is all the more true since the main Canadian banks have inflated their loan portfolios in recent years.
BMO Equal Weight Banks ETF (TSX:ZEB) offers exposure to major Canadian bank stocks. Its shares are up 36% year-over-year since early afternoon Jan. 21. Investors should be familiar with its main title. This is a snapshot of the stocks of the six major Canadian banks, which include TD Bank, Scotiabank, Bank of Montreal, and Royal Bank. Investors can rely on bank stocks during a rate-tightening cycle.