Simeon Hyman, Global Investment Strategist and Head of Investment Strategy at ProShares is joined by Investment Strategists, Daniel Bush and Leks Gerlak, to discuss portfolio solutions for rising rates, inflation and duration risk.
Since the beginning of 2022, real rates have been on the rise. Interest rates may continue to rise even if current inflation turns out to be transitory. Stocks are not insulated from these rising rates. From a peak +50% growth rate in S&P 500 earnings in 2022, growth rates have plummeted to an estimate of close to 0% in 2022.
Some stock sectors, like financial, energy, and industrials, perform better when interest rates are rising. The Nasdaq Equities for Rising Rates Index places a heavy focus on these sectors, and it therefore captures their upside. Made up of five sectors and roughly fifty stocks, this index is designed to outperform in a rising rate environment. The combination of careful sector and stock allocation drive the index’s impressive performance.
ProShares’ rising rate solution is their Equities For Rising Rates ETF (EQRR). This ETF tracks the performance of the Nasdaq U.S. Large Cap Equities for the Rising Rates Index. This is the first U.S. equity ETF specifically tailored to the rising rate environment and designed to outperform traditional U.S. indexes. EQRR can be used to complement traditional large-cap equity investments.
A fixed income strategy can also be employed for a rising rate environment. Interest rate hedged bond ETFs can practically eliminate interest risk and preserve credit risk, although they’re likely to underperform if interest rates fall. Investment Grade-Interest Rate Hedged (IGHG) hedges investment-grade bonds against rising rates by taking short positions in Treasury futures. This fund tracks the performance of the FTSE Corporate Investment Grade (Treasury Rate-Hedged) Index, and it offers lower interest rate sensitivity than short-term bonds by targeting a duration of zero.
Lastly, ProShares Short 7-10 Year Treasury (NYSEARCA: TBX) corresponds to the inverse (-1x) of the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index. Inverse funds hedge against declines, underweight exposure to a market segment, and seek profit from a market decline.
ProShares has been a leader in ETFs since 2006. They offer one of the largest lineups of ETFs, managing over $60 billion in assets. ProShares continually innovates solutions for dividend growth and ETF investing.
To learn more on this topic, catch the replay: Positioning Your Portfolio for Rising Interest Rates.