For Canadian investors watching the financial landscape, the ascent of interest rates might feel like a bitter pill to swallow in the immediate term.
Yet, it’s worth noting that these rate hikes, as unpalatable as they might seem now, serve a critical purpose: to rein in inflation. Left unchecked, high inflation can erode our purchasing power, distort economic decision-making, and even unsettle long-established financial systems.
But how does one navigate these choppy financial waters? The silver lining is that even in a rising rate environment, strategic moves can be made to protect and even grow one’s investments.
As an ETF investor, I’d suggest considering two primary strategies to shield your portfolio from the brunt of rising rates. Here’s an explanation of each one and an ETF pick to put it in play.
Option #1: Buy a HISA ETF
As interest rates surge, traditional bank savings products, once the underdogs in the investment world, are making a compelling comeback.
GICs (Guaranteed Investment Certificates), for instance, have emerged as increasingly attractive options, boasting yields that have soared over the 5% mark.
But it’s not just GICs stealing the limelight; ETFs that invest in high-interest savings accounts (HISAs) are also riding this wave, offering similar enticing yields. So, what’s the allure of these HISA ETFs?
For starters, they provide a robust safety net for your principal. These funds invest in high-interest savings accounts across major banks, anchoring their investments in the bedrock of established financial institutions. This structure offers a degree of security that’s hard to rival, particularly in volatile times.
Moreover, HISA ETFs not only safeguard your initial investment but also ensure a consistent inflow of returns. They disburse monthly income, turning them into reliable sources of cash flow for investors.
Perhaps the most distinctive feature of these ETFs is their adaptability. Their annual yield moves in harmony with prevailing interest rates. As rates climb, so does the yield of these ETFs, ensuring that investors are always in step with the broader financial environment.
Case in point, Purpose High Interest Savings Fund (TSX: PSA) is currently paying a net annual yield of 5.30% after its 0.16% expense ratio. Outside of GICs, not many very low-risk assets can rival what this ETF delivers right now.
Option #2: Do nothing and stay the course
For long-term investors who have planted their seeds in diversified ETFs, there’s a strategy that might sound counterintuitive in these changing times: do nothing. That’s right. Sometimes, in the complex world of investing, inaction proves to be the most prudent action.
When rates rise, the immediate impulse might be to overhaul one’s portfolio, trying to realign it with the current market conditions. But this can be a treacherous path. Here’s why: The market is a complex machine, influenced by myriad factors, not just interest rates. While rates play a role, they’re merely a single variable in a vast financial ecosystem.
Knee-jerk reactions, driven by short-term events, can compromise the long-term growth trajectory of a well-diversified portfolio. Changing your investment strategy based on transient conditions might mean missing out on the potential benefits of compounding, or worse, selling assets at an unfavourable time, only to buy them back later at a higher price.
Furthermore, diversified ETFs are designed for resilience. They encompass a wide range of assets, each reacting differently to various economic conditions. While some holdings might feel the pinch of rising rates, others might thrive, creating a balanced effect overall.
For a diversified ETF to invest in long term, consider BMO S&P 500 Index ETF (TSX: ZSP), which offers exposure to the well-known S&P 500 index for a low 0.09% expense ratio.
