ETF Specialist

Fear of Rising Rates Can Sow the Seeds of Bad Behavior

Phillip Yoo, CAIA

Rising interest rates can hurt investors’ fixed-income portfolios. Investors have been fretting over rising rates for years now. Many have been trying to reposition their portfolios to shield against the negative effects of higher rates. In some cases, their attempts to do so have yielded results that pale in comparison to a do-nothing approach.

In this article, I will examine the case of  PowerShares Senior Loan Portfolio (BKLN), which has been a popular choice for investors looking to lessen the risk of rising rates. This is evidenced by the fund’s heft (it had $8 billion in assets as of the end of March) and erratic flows. It is also perhaps the poster child for the futility of investors’ efforts to stay a step ahead of the Fed. I will also explore other options from the menu of fixed-income exchange-traded funds, and beyond, that might help investors better manage interest-rate risk in their portfolios. The common thread among all of them is that they’ll inevitably prove ineffective unless they are deployed with discipline.

Phillip Yoo, CAIA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.