Feeling 22: Taylor Swift and ETFs for Rising Interest Rates

As rates reach 22-year high, the yield curve angst hits investors.

One would be forgiven for hearing Taylor Swift’s music in their head this summer, as her headline-grabbing tour crosses the country. They'd also be forgiven for thinking of ETFs for rising interest rates.

And as interest rates hit a 22-year high, her 2012 song “22” may qualify as the summer anthem for markets. While Swift’s words—“I don’t know about you, but I’m feeling 22”—reference the turmoil of that age, ETF investors might feel the foreshadowing of a murky autumn.  

While the immediate impact of the Fed’s quarter-point rate hike last week may not be noticed amid barbecues and trips to the beach, the cost of living in fact is way up.  

Market pundits argue that the worst is over and that the Fed will be cutting rates by early next year, but little evidence exists that Fed governors are thinking that way. 

They seem to be more focused on things like credit card interest rates at their highest levels ever, ironically, 22%. So, for consumers who have amassed credit debt, they are feeling that 22 right now.  

There’s a real possibility that rates stay up here for a while. That might matter more once outdoor temperatures cool down—long after Swift’s tour ends and 22 hangs around in ‘23.  

Inverted Yield Curve 

There’s also the curious case of the inverted yield curve. As we enter August, the two-year U.S. Treasury note yields 4.87% and the 10-year U.S. Treasury bond yields 3.96%. That’s not typical, not only in the stubbornness with which the “inversion” of the longer-maturity bond versus the shorter-term bond, has continued, nor in the fact that it has not been this inverted since August 1981. That’s well before Taylor Swift and most of her fans were born. 

This presents a set of potentially impactful decisions for investors as August starts. Earnings season is still in progress, the monthly inflation report hits as usual this Friday, and there’s the specter of the annual Jackson Hole Economic Summit Aug. 24-26, which has created market disruption in the past. 

ETFs for Rising Interest Rates and Inflation 

For those ETF investors trying to find something to hold on to in the wake of a 22-year high in inflation, it may be worth their time to get reacquainted with these ETFs for rising interest rates and inflation:

One is floating rate bonds, where ETFs such as the iShares Treasury Floating Rate Bond ETF (TFLO) offer an opportunity to enjoy today’s elevated rates, but with some upside if inflation is not quite in the rearview mirror. TFLO is a $9.5 billion ETF that owns only nine bonds. All are issued by the U.S. Treasury, have maturities out to three years and those rates reset over 90 days, based on market interest rates. TFLO currently yields 5.2%, which is naturally far up from where it was for years until the current interest rate cycle started. 

For equity investors, the $1 billion Horizon Kinetics Inflation Beneficiaries ETF (INFL) offers a very non-S&P 500 Index approach to the current environment. The fund invests in companies around the globe in industries that typically can increase their revenue without a corresponding increase in expenses.  

Examples include energy production, mining, transport and certain types of real estate companies that are “asset light,” which means they avoid long-term commitments to real estate ownership, instead providing services to that industry. INFL tends to run a concentrated portfolio of about 20-60 stocks and is up 6% this year. 

July was hot, at the beach and on the stage. But August has arrived. And with it, a new set of opportunities where the ability of ETFs to target very specific solutions for investors will again be in full bloom.