7 Best ETFs to Buy to Combat Rising Interest Rates

best ETFs - 7 Best ETFs to Buy to Combat Rising Interest Rates

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Because they represent a broader approach to shifting market conditions, the best ETFs may fare better than picking individual stocks, and that makes good sense now.

By virtually every reputable indicator, the Federal Reserve intends to raise benchmark interest rates three times this year.

Indeed, the central bank has been signaling such a strategy for a while, alarmed by soaring consumer prices. In response, investors may want to consider exchange-traded funds.

That’s not to say that certain stocks don’t have a superior fundamental profile to navigate higher borrowing costs.

With the Fed’s potentially aggressive hawkish policy in mind — analysts from Goldman Sachs predict that it might hike rates four times in 2022 — some industries are better poised to survive and possibly thrive the rotation out of risk-on assets into safer fare. Still, don’t count out the best ETFs.

Indeed, it may be time to start thinking much more seriously about this segment. Representing a basket of stocks and other asset classes, these funds inherently distribute risk across a wider canvas.

You’re not banking all of your hopes in one trade. If one name in the basket falters, you have other companies or assets to lift you up. Of course, the best ETFs will feature more winners than losers.

Another advantage to broad-based funds is balance. An unbalanced asset class like cryptocurrencies can yield dramatic gains within a short time window. However, when the sector sours — as it did recently — the devastation can be horrifying, especially for conservative investors.

It’s not guaranteed that the Fed will be hawkish indefinitely, not with the money velocity dipping near all-time recorded lows. With uncertainty being the only certainty, these best ETFs to buy may provide some reassurances.

  • iShares US Utilities ETF (NYSEARCA:IDU)
  • Financial Select Sector SPDR Fund (NYSEARCA:XLF)
  • SPDR S&P Regional Banking ETF (NYSEARCA:KRE)
  • SPDR S&P Insurance ETF (NYSEARCA:KIE)
  • Vanguard Consumer Staples Index Fund ETF (NYSEARCA:VDC)
  • Charles Schwab US REIT ETF (NYSEARCA:SCHH)
  • iShares Global Clean Energy ETF (NASDAQ:ICLN)

All investment classes carry risk. At the very least, these funds tend to mitigate upside when circumstances are favorable to the underlying sector. As with any investment, always perform due diligence before proceeding.

Best ETFs to Buy: iShares US Utilities ETF (IDU)

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iShares US Utilities ETF features broad coverage of the utilities segment, with nearly 57% of market value attributed to electric utilities (as of Jan. 20, 2022).

The next biggest subsegment at 25% is multi-utilities, followed by environmental and facilities services at just under 9%.

To be clear, even if I consider it one of the best ETFs, IDU shares haven’t put up the most encouraging performance, declining nearly 6% year-to-date. If I’m being truly blunt, the 7% trailing-year performance isn’t anything to write home about.

Still, this is what I call the long game approach to best ETFs. Whether we have higher borrowing costs or not, we all need our utilities and critical services. Cynical, maybe, but it works.

Financial Select Sector SPDR Fund (XLF)

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Okay, so with the Financial Select Sector SPDR Fund, we’re going to dip into the obvious play among best ETFs.

Indeed, if you were to perform a Google search for the underlying search item, there’s a good chance that XLF will come up at the top of the list. In some cases, being too obvious may be a bearish signal, but XLF makes for a strong argument here.

Essentially, as investors — particularly the high-roller types — come down from their hopium, they’re going to need real guidance.

It’s one thing to help clients buy bullish stocks in a bull market; it’s quite another to help them survive in choppy and perhaps downright volatile waters. This is where big banks beat the snot out of self-appointed self-help YouTube gurus.

And guess what? The Financial Select Sector SPDR Fund features a heavy dosing of fine institutions, with nearly 38% of its holdings’ market value tied to banks and almost 27% geared toward capital markets. Further, a sizable 17% is associated with the insurance segment, adding stability to the portfolio.

Also, with an expense ratio (or fees associated with the fund) of 0.12%, XLF is significantly cheaper than the segment average of 0.8%.

Best ETFs to Buy: PDR S&P Regional Banking ETF (KRE)

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While big banks will comprise the many obvious choices for best ETFs, investors concerned about ever-rising rates should look into smaller regional institutions.

Therefore, don’t ignore the SPDR S&P Regional Banking ETF in your research to mitigate risk.

Some experts believe that going local could be better than so-called universal banks. Per the Economic Times:

Regional banks make a hefty chunk of their revenues from net interest margins, boosting their appeal as investors increasingly expect the Fed to hike interest rates more aggressively this year to control inflation. The central bank meets next week and is expected to raise interest rates as soon as March.

Though appealing, one of the issues for regional banking is that the underlying economy still needs to be somewhat robust. It’s great that financial institutions will generate more profitability from higher rates.

However, if the lift in borrowing costs stifles entrepreneurs from taking risks, the end result could be a wash. If the Fed goes too far, the wider impact could be a net negative.

Still, KRE is an intriguing way to perhaps hedge some of the risks associated with big banks. Further, the fund features an expense ratio of 0.35%, lower than the 0.80% category average.

SPDR S&P Insurance ETF (KIE)

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If rising rates have you worried, zero in on the insurance segment. Primarily, as a general rule of thumb, insurance stocks share a direct correlation with higher interest rates. The higher the rate, the greater the growth for insurance firms.

The reason stems from this sector’s bond investments, which yield stronger returns during a higher-rate environment.

One of the best ETFs in this focus area, SPDR S&P Insurance ETF, may see rising relevance as the year progresses as a result of its holdings allocation.

Geared mostly to the property and casualty insurance subsegment with a weighting of 45.4%, this area could see greater growth if society normalizes from the omicron threat. While work from home is still very much a thing, it might not be indefinitely.

Further, should we see some semblance of the old normal, traffic patterns should rise, which would require greater insurance coverage.

In addition, KIE is significantly tied to the life and health insurance subsegment with a 25.6% weighting. Naturally, the coronavirus pandemic gave millions of people time to reflect on the important matters of life, which should benefit KIE.

Vanguard Consumer Staples Index Fund ETF (VDC)

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Should some measure of financial hardship fall on Americans, you can expect consumer behaviors to change.

Sure, a stereotype exists that Americans are nothing more than just appendages of their credit cards. However, when push comes to shove, we’re all humans. This means jettisoning goods and services that are luxuries.

However, certain sectors we cannot live without, either because they’re life necessities or because we’re addicted to them. Either way, this fundamental narrative bolsters the argument for Vanguard Consumer Staples Index Fund ETF.

Focusing almost exclusively on U.S. blue chips, Vanguard Consumer Staples is not going to make you rich. It will, however, do its best to keep you out of trouble.

Undergirding the top holdings of VDC are some of the who’s who in industry, ranging from household goods giants to big-box retailers to soft-drink titans to even tobacco firms.

As well, you have toothpaste manufacturers and beauty specialists. Even during a recession (indeed because of it) people need to be presentable to secure a job.

Though VDC is one of the best ETFs in terms of relevance, it’s also one of the cheapest when you factor in its 0.1% expense ratio, which is significantly lower than the 0.4% category average.

Best ETFs to Buy: Charles Schwab US REIT ETF (SCHH)

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Initially, I struggled with including Charles Schwab US REIT ETF on this list because the narrative is quite counterintuitive.

The Covid-19 pandemic and its resultant economic challenges have made acquiring real-estate investment trusts a hit-or-miss affair.

For instance, back during the worst of the crisis in 2020, no one wanted to touch REITs levered to retail properties such as shopping malls.

Government-mandated lockdowns and mitigation protocols — along with the health threat itself — meant such investments didn’t make sense at the time. Now, with people desiring traditional social experiences, these ideas are starting to become reasonable.

That being said, the top holdings for SCHH should provide some reassurances. We’re talking about names tied to mobility-based infrastructures, storage facilities and senior-care services. The latter two subsegments are particularly interesting to me due to the wave of baby boomers retiring.

If you don’t care about the underlying storyline, perhaps you might care about how easy SCHH is on your wallet? With an expense ratio of 0.07%, it’s far lower than the category average of 0.41%.

iShares Global Clean Energy ETF (ICLN)

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Although individual investors may be ideally served with the best ETFs tied to traditionally stable and secure sectors, the economy at large must continue moving forward.

Otherwise, if an administration is too conservative, it risks getting leapfrogged by international competitors. Therefore, a bullish argument can be made for the otherwise risky iShares Global Clean Energy ETF.

Let’s get the bad news out of the way. As I mentioned, ICLN is risky, dropping over 14% on a YTD basis. Over the trailing year, the ETF has hemorrhaged nearly 44%, which means this fund is not for the faint of heart.

Much of the loss stems from the top holdings of ICLN, which features companies that have been utterly devastated following their pandemic-fueled highs.

While you may want to wait until ICLN settles down, when (or if) it eventually does, iShares Global Clean Energy is worth consideration with speculation-focused funds.

For one thing, millennials and Generation Z are more sustainability-oriented than prior generations. Second, multiple countries — including of course the U.S. — are committed to various pro-green targets.

Still, due diligence is necessary before pulling the trigger.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.


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