How to Shield Your Portfolio From the Impact of Soaring Interest Rates

These two safe ETFs can keep your money safe from rising interest rates while paying out a 5% yield.

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As a dedicated long-term investor, I generally steer clear of making tactical adjustments to my portfolio based on the current economic environment.

My investment philosophy hinges on a globally diversified portfolio, maintaining a steadfast course, regardless of short-term market fluctuations. This approach is rooted in the belief that a well-diversified portfolio can weather various economic conditions over time.

However, the current economic landscape, characterized by the “higher-for-longer” interest rate environment in Canada, may understandably raise concerns for some investors. It’s valid for investors to be apprehensive about how these rising rates might affect their portfolios.

For those looking to either shield their investments from the impact of these soaring rates or even potentially profit from the situation, you can do so via exchange-traded funds (ETFs). Keep reading to find out how.

Interest rates, asset classes, and you

The relationship between interest rates and various asset classes is complex, especially in a rising-rate environment. As interest rates climb, the impact is felt across stocks, bonds, and cash, each reacting differently to these changes.

Generally, rising interest rates can create headwinds for stocks. Higher rates often lead to increased borrowing costs for companies, which can reduce corporate profits and, consequently, stock valuations. Additionally, as interest rates rise, the future cash flows of a company are discounted at a higher rate, potentially making them less attractive to investors.

For bonds, the impact of rising rates is more direct and typically negative. Bond prices move inversely to interest rates, meaning as rates go up, bond prices tend to go down. This is particularly true for bonds with longer duration, as they are more sensitive to interest rate changes.

In a rising-rate environment, cash and cash equivalents often emerge as the real winners. Products such as savings accounts and Guaranteed Investment Certificates (GICs) become more attractive, as they start offering higher yields with virtually no risk.

How to invest in cash

In the current climate of rising interest rates, investing in cash can be a wise short-term strategy, particularly through high-interest savings ETFs.

These ETFs have become increasingly attractive as they offer higher yields and greater liquidity than traditional bank savings accounts compared to GICs.

For Canadian investors, the added advantage is that these high-interest savings ETFs can be held in both Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), optimizing the tax efficiency of their investments.

One of the key benefits of high-interest savings ETFs is their yield, which has become even more appealing in the current environment. Most of these ETFs yield upwards of 5% annually, a significant increase compared to the past few years.

In addition to the high yield, these ETFs offer monthly payouts, which can be particularly beneficial for retirees or other investors who rely on their investments for regular income.

Two ETFs I like here include CI High Interest Savings ETF (TSX:CSAV) and Purpose High Interest Savings Fund (TSX:PSA), which are currently paying net (after fee) annual yields of 5.17% and 5%, respectively, as of December 7, 2023.

A great way to use these ETFs is as a place to park spare cash while you look for buying opportunities in individual Canadian stocks (and the Fool has some great suggestions below).

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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