Best ETFs for Rising Interest Rates
Rising rates hurt bonds and growth stocks. These ETFs benefit from higher rates or at least protect against them.
Don't have time? Here's what you need to know:
- 1Rising rates hurt long-duration bonds and growth stocks most severely
- 2Shorten bond duration (BSV instead of BND) to reduce interest rate sensitivity
- 3Financials (XLF) and value stocks (SCHV) tend to benefit from rising rate environments
- 4Do not eliminate bonds — shift duration rather than making dramatic allocation changes
How Rising Rates Hit Your Portfolio
When the Federal Reserve raises interest rates, two things happen: bond prices fall (existing bonds with lower rates become less attractive) and high-growth stock valuations compress (future earnings are discounted at higher rates). In 2022, the Fed raised rates from 0% to 4.5%. BND lost 13%. The Nasdaq 100 lost 33%. Growth stocks and long-duration bonds are the biggest losers in a rising rate environment.
But some assets benefit: banks earn more from the gap between lending and deposit rates. Short-term bonds quickly reprice to higher yields. Floating-rate loans adjust upward automatically. Cash equivalents like money market funds and T-bills yield more immediately.
Best ETFs for Rising Rate Environments
| ETF | Strategy | Expense Ratio | How It Benefits From Rising Rates |
|---|---|---|---|
| BSV | Short-Term Bonds | 0.04% | Shorter duration = less price sensitivity; reprices quickly |
| BKLN | Senior Floating-Rate Loans | 0.65% | Loan rates adjust upward automatically |
| XLF | Financial Sector | 0.09% | Banks profit from wider interest rate spreads |
| SHY | 1-3 Year Treasuries | 0.15% | Very short duration; minimal price decline |
| BIL | 1-3 Month T-Bills | 0.14% | Near-zero duration; tracks current short-term rates |
| SCHV | Large-Cap Value | 0.04% | Value stocks handle rising rates better than growth |
Portfolio Adjustments for Rising Rates
The simplest adjustment: shorten your bond duration. Replace BND (duration ~6 years) with BSV (duration ~2.6 years). This reduces the hit from rate increases while still earning reasonable yield. You do not need to eliminate bonds entirely — just reduce duration.
On the equity side, tilt toward value stocks (VTV, SCHV) and away from high-growth tech (QQQ). Value companies are typically mature, cash-flow positive businesses that are less sensitive to discount rate changes. Financial stocks (XLF) directly benefit from higher rates as banks earn more on loans.
Tip: Do not try to time rate changes. The Fed's actions are difficult to predict, and the market often prices in expected rate moves before they happen. Make moderate adjustments to duration and factor tilts rather than dramatic portfolio overhauls.
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Frequently Asked Questions
Should I sell all my bonds when rates are rising?
No. Short-term bonds (BSV, SHY) are minimally affected by rate changes. Shift from intermediate/long bonds (BND, TLT) to short-duration bonds rather than going to zero. Once rates peak, you want bond exposure to capture the gains when rates eventually fall.
Do rising rates always hurt stocks?
Rising rates from a low level (0% to 3%) are often tolerable because they signal economic strength. Rising rates from an already high level (5% to 7%) tend to hurt stocks more. The pace matters too — gradual increases are digested better than rapid hikes.
Is a money market fund or T-bill ETF a good option during rising rates?
Yes — for cash you need within 1-2 years. BIL (T-bill ETF) and money market funds yield whatever the current short-term rate is (4-5% in 2024). They have near-zero price risk. But they will not grow your wealth long-term — once rates fall, yields drop back down.
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Alex Harrington
CFA Level II Candidate, Finance & Economics
Alex Harrington is an independent ETF researcher and personal finance writer with over 8 years of experience analyzing exchange-traded funds. A CFA Level II candidate with a background in economics, Alex has reviewed 800+ ETFs and helped thousands of beginners build their first investment portfolios through clear, jargon-free education.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.