(The opinions expressed here are those of the author, a
columnist for Reuters.)
By John Wasik
CHICAGO, March 20 For active income investors,
the next year or so will be a trying time of tough love. While
yields are rising, which depresses prices of most
income-oriented securities, this presents other opportunities.
On Wednesday, Federal Reserve Chairman Janet Yellen signaled
that interest rates may rise as early as next spring, and the
market reacted with force, continuing a pullback that began
nearly a year ago.
Some unheralded optimism lies behind Yellen's comments that
the Fed will end its bond-buying stimulus program this fall and
probably raise short-term interest rates in the spring of 2015.
That bodes well for a number of sectors which benefit from
slowly rising rates and consumer spending.
Economic growth, low inflation and steady improvement in
employment are pushing the Fed to wind down the central bank's
$3 trillion (total) program to buy Treasury securities and keep
rates near zero - a monetary stimulus plan that's been in force
since the meltdown of 2008.
What makes sense for investors now? If you need income and
aren't locked into highly rated corporate, municipal or Treasury
bonds that you hold to maturity, you'll need vehicles that can
adjust to rising rates without losing value.
For short-term cash, money-market mutual funds are flexible
because they invest in short-term corporate and Treasury debt.
Their net asset values are fixed at $1. Generally, any bond with
maturities under two years will be least impacted by rising
Rounding out your cash or short-term income portfolio should
be specialized funds that can benefit from rising rates. The
iShares Floating Rate Bond Exchange Traded Fund, for
example, tracks an index of short-maturity investment-grade
bonds that have adjustable rates.
The iShares fund, charging 0.20 percent for annual expenses,
is up 0.5 percent for the year through March 19. That compares
to a negative 0.3 percent return for the Barclays U.S. Aggregate
Bond Total Return Index, a benchmark for the U.S. bond market,
over the same period.
Another interest-rate tracking fund is the PowerShares
Senior Loan Portfolio, which has gained 3 percent for
the year through March 19. Following an index of senior loans
issued to corporations and partnerships, the fund charges 0.65
percent annually for expenses.
Despite the cautionary tone of Yellen's first statement as
Fed chief, income markets got the yips after her pronouncements.
In the wake of Yellen's press conference yesterday, prices
on two-year Treasury notes fell to their lowest level since
2011. And it's going to be bumpy for any yield-oriented investor
in preferred stocks, real estate investment trusts, high-yield
corporate bonds and most mid- to long-maturity bonds.
John Blank, chief equity strategist for Chicago-based Zacks
Investment Research, predicts the yield on the 10-year Treasury
note could reach 3.5 percent by December of this year, up from
about 2.7 percent recently. That would be a game changer for
active income investors.
"It's been easy money for bonds for the past 30 years,"
If the economic rebound in the U.S. continues, most of the
potential upside will be in stocks, particularly companies in
information technology, banks, consumer discretionary and
cyclical industries, Blank predicts.
While U.S. home sales are still sluggish, likely due to a
brutal winter, jobless claims are near a three-month low with
employment slowly improving. If anything, Yellen's comments were
a nod to the growing evidence that the U.S. recovery is still on
Should the recovery continue apace, corporations will
continue to invest in new equipment, consumers will have more
money to spend and increased employment will buoy the economy at
large. That means companies sitting on cash could be spending on
The Vanguard Information Technology ETF tracks an
index of the leading technology companies including Apple Inc
, IBM and Cisco Systems Inc. The fund
charges 0.14 percent for annual management expenses and has
gained 28 percent for the year through March 19.
Consumers feeling flush will gravitate towards discretionary
purchases, home spending, recreation and entertainment. The
Consumer Discretionary Select Sector SPDR ETF follows an
index that includes Comcast Corp, Amazon.com
and Walt Disney Co. The fund is up 29 percent for the
year through March 19 and charges 0.16 percent for annual
One of the largest beneficiaries of rising rates, though,
will be banks, which can eventually raise their loan rates and
profit margins. A worthy choice in that sector is the SPDR S&P
Bank ETF, which tracks an index of leading regional
banks. The fund is up 28 percent for the year through March 19.
(Follow us @ReutersMoney or here
Editing by Lauren Young)