How Income-Seeking Investors Can Navigate a Rising Rate Environment

With interest rates on the rise, income-seeking investors have a choice to make: accept underperformance in bond portfolios or shift allocations toward riskier asset classes? Choosing the right path requires a clear understanding of how interest rate hikes are likely to affect the markets, and why income-focused investments could face challenges this year. 

If you’re looking for ways to preserve income, shifting your focus toward alternative investments could be a good strategy. Below, we share some key things to consider, and potential sources of yield for the year ahead.

The Effect of Rising Interest Rates

Rising interest rates have been top of mind for many Americans, due in large part to their impact on everything from homebuying to student loans. Following a three-year period where interest rates remained at historic lows due to the COVID-19 pandemic, the Federal Reserve raised rates by 0.25% in March. 

Designed to combat inflation, the interest rate change is expected to be one of several this year, and it could lead to significant shifts related to lending and investments. So, how exactly do rising interest rates affect the markets? There are a couple of different factors at play and both may have an impact on income-focused investments.

The first factor is bond performance. Generally speaking, bond values tend to decrease as interest rates increase, thereby reducing returns. The second factor is volatility caused by market anxiety. If economists feel that the Federal Reserve may have missed the mark on managing inflation, the markets might be in for a bumpy ride.

The Income Potential of Alternative Investments

As the financial landscape continues to shift, a variety of alternatives could make for worthwhile additions to your portfolio. These include preferred securities, mortgage real estate investment trusts (REITs), and floating rate notes (FRNs).

Here are some key things to know about each of these opportunities: 

• Preferred Securities: With their high diversification potential, preferred securities can be a valuable addition to a balanced portfolio. Often considered hybrid securities, they share characteristics with both stocks and bonds and generally have a higher-than-average yield. 
• Mortgage Real Estate Investment Trusts (REITs): Offering access to the real estate market, mortgage REITs earn income on the interest from mortgages and mortgage-backed securities.
• Floating Rate Notes (FRNs): As bonds with variable interest rates, FRNs pay a coupon that reflects current interest rates. Unlike fixed rate bonds, which pay the same amount regardless of the current interest rate, FRN returns are generally higher in a rising rate environment.

While these investments have some key differences, they are all solid options when it comes to generating income and they can also complement each other.

Where to Look for Yield This Year

With interest rates poised to rise several more times throughout the year, reassessing your current asset mix and looking to alternatives is one of the best ways to generate yield.

To access a variety of income-generating opportunities, ETFs are a solid option. Offering exposure to alternative investments including preferred securities, REITs and FRNs, VanEck’s Preferred Securities ex Financials ETF (PFXF), Mortgage REIT Income ETF (MORT), and Investment Grade Floating Rate ETF (FLTR) have some significant benefits. These include strong returns and risk-adjusted profiles. 

As a leading provider of investment opportunities for more than 60 years, VanEck thinks beyond the markets to identify new trends. Their suite of ETFs offers options for every type of portfolio, and they can help investors achieve their financial goals. 

Although interest rate increases can pose certain challenges for income investing, looking to new opportunities can minimize risks and offer new avenues for growth. With a careful strategy and the right ETFs, you can continue to generate income in the months and years to come.

DISCLOSURES

This is not an offer to buy or sell, or recommendation to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

VanEck ETFs:

The principal risks of investing in VanEck ETFs include sector, market, economic, gold industry, political, foreign currency, world event, index tracking and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. The Funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs that invest in high-yield securities are subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. Investors should be willing to accept a high degree of volatility and the potential of significant loss. ETFs that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks.

Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.