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Did you see The Wall Street Journal headline yesterday? The one that says “Fed Puts Rate Increase on the Radar.” How about the lead of the story, which said: “Conversation at the Federal Reserve’s most recent policy meeting turned to something that hasn’t been a serious topic for years: the possibility of interest-rate increases in the near future.”
I sure hope so, because it fits exactly with what I have been forecasting for more than a year now. I told you that the decades of experience Martin and I have following the interest rate markets and Fed policy make something very clear. The Fed can and will be forced to follow the long-term rate increases we’re already seeing in the bond market by hiking short-term rates.
In a sense, the Fed is already “hiking” because it’s tapering down QE — the program that replaced rate cuts once rate cuts were exhausted. And mark my words, next up is actual rate increases — something that the Fed itself is actually now acknowledging.
So how do you make money from the Fed’s tapering and with interest rate hikes on the horizon? That’s a question I field from time to time.
Some investors believe the only way is to buy an inverse ETF that rises in value when bond prices fall and rates rise. But nothing could be further from the truth. I’ve actually been putting several strategies to work in this market, and you can too!
First, you can shift your fixed-income investments OUT of bonds and funds vulnerable to rising rates and IN to investments designed to protect you from them.
Nobody said you have to just sit there and take it, stuck in a long-term government bond fund, when rates rise and long-term bond prices fall. Instead, you can invest in an ever-growing variety of funds and ETFs that target much less vulnerable corners of the market.
Floating-rate note ETFs invest in securities and loans whose rates rise along with the general level of shorter-term interest rates. They work in a rising-rate environment because they feature low average maturities and adjusted durations, making them much less vulnerable to losses than long-term bonds.
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| Even aircraft leasing firms can look attractive in this rising interest rate environment. |
Second, you can shift into interest rate investments that are more levered to stock performance than bond prices.
Shorter-term, high-yield ETFs may also insulate you in an environment where rates are rising alongside an improving economy. That’s because junk bonds tend to track stock prices, and stocks tend to do well in periods of economic growth.
Still another option? Convertible bonds, which feature some of the features of both bonds and stocks. Just look at something like the SPDR Barclays Convertible Securities ETF (CWB), which has dramatically outperformed other bond ETFs in the past year and a half.
Third, you can buy rate-sensitive stocks that benefit from rising market volatility or rising rates. Higher interest rates are bad for a lot of stocks. But not all of them. Some firms should actually see their profit outlook improve as a result of rising rates and the increased volatility that tends to accompany them.
Exchange operators are one group of names I’ve focused on. Discount brokers are another. Even aircraft leasing firms have looked attractive. Two of my favorite names in those businesses recently hit their highest levels in almost five and a half years, while one just rose to its highest level since the firm went public.
Bottom line: Changing rates can offer a bonanza of profits for investors who know where to look and what to buy. Hopefully some of these ideas will get you pointed in the right direction.
Want to go further? Then you’re in luck! I just released a special educational course called “How to Profit from Changing Interest Rates.”
This is unlike anything we’ve ever done at Weiss. It’s designed to teach you all about the ins and outs of the interest rate markets — and how to put them to work for you. Not just in your core investment portfolio, but in your personal finances, your real estate, your speculative holdings, and more!
The first session of this seven-part course is free. To watch session #1 and learn how to gain access to the remaining sessions, all you have to do is click here for more details. Or call my customer service staff at 800-711-4090 and they’ll get you hooked up right away!
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
