Is your portfolio ready for interest rate hikes?
AAt its last meeting on Wednesday, the Federal Reserve announced that it would increase its gradual reduction in bonds again from January, increasing targets to end the central bank stimulus, reports CNBC. Based on current projections, most Fed officials are forecasting up to three interest rate hikes next year, as its inflation outlook has risen significantly for 2021.
Central bank bond purchases will decline by $ 60 billion, a change of $ 30 billion from December and a much more aggressive rate than the $ 15 billion per month cut that began in November. It will allow the tapering process to end as early as late winter or early spring next year, and will pave the way for interest rate hikes, if the Fed deems it necessary; current indicators all point to yes.
“Economic developments and changes in outlook justify this development in monetary policy, which will continue to provide appropriate support to the economy,” President Jerome Powell said at his post-meeting press conference.
At the meeting, the Fed raised its inflation outlook for this year, raising it from 4.2% to 5.3% for all inflation, and from 4.4% excluding energy and food, against 3.7%. At the same time, the projection for the unemployment rate was lowered to 4.3% as job creation continued to rebound.
Fed members are leaning heavily on the reality of interest rate hikes next year; the dot plot for individual expectations saw just six of 18 members anticipating less than three interest rate hikes next year. None of the members expect rates to stay at their current lows.
Investing for a rising interest rate environment with EQRR
the ProShares Equity ETF for Rate Rise (EQRR) provides investors with exposure to large cap US companies that outperform in environments of rising US Treasury interest rates. The fund does this by focusing on sectors that have the highest correlation to the 10-year US Treasury yield and investing in the best performing securities of those sectors in rising rate markets.
EQRR seeks to track the performance of the Nasdaq US Large Cap Equities for Rising Rates Index, an index that outperforms during periods of rising interest rates relative to standard large cap indices.
The index is drawn from a universe of 500 of the largest companies listed on the US stock exchanges and contains the top 50 of those that have historically outperformed in times of rising interest rates or 10-year US Treasury yields. Each quarter, the index selects the five sectors most sensitive to current interest rates based on the correlation between the sector’s weekly performance and the weekly percentage changes in 10-year U.S. Treasury yields over the three last years.
The sector with the highest correlation is given a weight of 30%, the next highest receives 25%, in 5% increments down to the lowest at 10%; the 10 most important stocks from each sector that have the highest over and under-correlation to changes in interest rates are chosen. If there are not enough qualifying large-cap companies, the mid-cap companies are removed and, in each sector, all holdings are weighted equally.
EQRR has an expense ratio of 0.35% and currently allocates 30.39% to financials, 25.38% to energy, 20.49% to basic materials, 14.31% to industrials and 9.42% telecommunications.
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