Interest rates

Rising interest rates: why ETFs are good investments in tough times

Exchange-traded funds, or ETFs, are baskets of securities that trade like stocks on the stock exchange.

“They give investors access to underlying investments, like stocks or bonds, and generally offer more diversification than a single stock or bond,” said Ashley Tran, deputy branch manager of Fidelity’s Tampa branch. , in Florida.

Tran says ETFs are a good choice for diversifying your portfolio and minimizing risk.

“Because ETFs track an index, they are an easy way for investors to build a well-balanced strategic asset allocation,” she explained.

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How and why does diversification help investors mitigate rising interest rates?

It’s important to note that there’s no surefire way to beat inflation when it comes to your investment decisions, but diversification can play a role.

“The goal of diversification is to reduce risk as much as possible by spreading investments across various financial instruments, sectors, regions and other categories,” said Falko Hoernicke, senior portfolio manager at Santa-based US Bank Private Wealth Management. Barbara, California. He explained that each of these categories reacts differently to changes in the macroeconomic environment.

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One such change the country is currently facing is a rising interest rate environment, Hoernicke said.

“History has shown that trying to time the market is not a good strategy,” Hoernicke said. “If investors only miss a few of the best days in the stock market, their account’s long-term performance may decline significantly.”

In this photo provided by the New York Stock Exchange, trader Ryan Falvey works on the trading floor, Tuesday, May 3, 2022. (Courtney Crow/NYSE via AP/AP Newsroom)

So when asked if investors should adjust their portfolios in response to Federal Reserve interest rate hikes, Hoernicke said that in most cases the answer is no, short of regular rebalancing.

“It’s good advice to keep overall asset allocation close to investors’ single target allocation, maintain a well-diversified portfolio invested in multiple asset classes/sub-asset classes, and not make only minor tactical changes whenever investors see opportunities without straying too far from the target strategic allocation,” he added.

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Why consider ETFs?

To that end, Hoernicke explained that ETFs have always been a good way to enter the market with little money and/or low cost.

“Investors who want to dip their toes into the stock market but don’t have enough cash to build a well-diversified portfolio of 30-50 individual stocks can use ETFs to invest in a large basket of individual stocks. is the underlying index of this ETF,” he continued.

Hoernicke says the costs to the investor are low, as transaction fees at online brokers have become very competitive, and management fees for ETFs that track a broad and well-known index like the S&P 500 are often not only a few basis points (1 basis point = 0.01%).