Best Bond ETF for Rising Interest Rates: Strategies, Picks, and Expert Insights
As interest rates rise, many investors look for ways to protect their portfolios while continuing to generate income. Bonds often decline in price when rates increase, making traditional bond investments less appealing.
However, certain bond ETFs are designed to perform better in rising-rate environments. This article explores the best bond ETFs for rising interest rates, backed by research, performance charts, and insights from financial experts.
Why Interest Rates Matter for Bond ETFs
Bond prices and interest rates move in opposite directions. When the Federal Reserve raises interest rates, newly issued bonds pay higher yields, making existing bonds with lower yields less attractive. As a result, bond prices fall.
Key implications for investors:
Traditional bond ETFs may see price declines.
Shorter-duration bonds and floating rate instruments become more favorable.
Investors may shift to active bond management or specialty ETFs.
Key Strategies for Investing in Bonds During Rising Rates
To mitigate the risk of interest rate increases, investors can consider the following strategies:
Shorten Duration: Shorter-duration bonds are less sensitive to interest rate changes.
Use Floating Rate Bonds: These adjust interest payments based on prevailing rates.
Target Inflation-Protected Securities (TIPS): These offer protection from inflation-related rate hikes.
Select Actively Managed Bond ETFs: Skilled managers may better navigate rate environments.
Top Bond ETFs for Rising Interest Rates
Below are ETFs tailored for rising interest rate environments based on duration, credit quality, performance, and liquidity.
1. iShares Floating Rate Bond ETF (FLOT)
Expense Ratio: 0.15%
Average Duration: 0.13 years
Yield to Maturity (as of 2024): ~5.2%
Why it works: FLOT holds investment-grade floating rate notes that reset their interest payments as rates rise, reducing duration risk.
2. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
Expense Ratio: 0.135%
Duration: 0.09 years
Current Yield: ~5.3%
Why it works: BIL invests in ultra-short-term Treasury bills that frequently roll over, limiting interest rate exposure.
3. iShares Short Treasury Bond ETF (SHV)
Expense Ratio: 0.15%
Duration: 0.36 years
Why it works: SHV offers exposure to short-term Treasury bonds, a safe haven with minimal duration risk during tightening cycles.
4. Invesco Senior Loan ETF (BKLN)
Expense Ratio: 0.70%
Average Duration: Less than 0.25 years
Why it works: BKLN holds senior secured floating rate loans, offering yield and protection from rate hikes.
5. Schwab 1-5 Year Corporate Bond ETF (SCHJ)
Expense Ratio: 0.03%
Average Duration: 2.61 years
Why it works: SCHJ provides low-cost exposure to short-term corporate bonds with relatively attractive yields and manageable interest rate sensitivity.
Performance Comparison Chart (2023–2024)
| ETF | 1-Year Return (%) | Duration (Years) | Yield (%) | Risk Level |
|---|---|---|---|---|
| FLOT | 5.4 | 0.13 | 5.2 | Low |
| BIL | 5.3 | 0.09 | 5.3 | Very Low |
| SHV | 4.9 | 0.36 | 4.8 | Very Low |
| BKLN | 7.1 | <0.25 | 7.0 | Moderate |
| SCHJ | 4.2 | 2.61 | 4.9 | Low to Moderate |
(Note: Returns are as of Q1 2025, sourced from ETF providers and Morningstar.)
Expert Insights on Navigating Rising Rates
Kathy Jones, Chief Fixed Income Strategist at Charles Schwab:
"Investors should be aware that while short-term yields are attractive, reinvestment risk and inflation remain concerns. Laddering strategies or floating-rate options can help mitigate risks."
Rick Rieder, CIO of Global Fixed Income at BlackRock:
"Floating-rate instruments are particularly useful when the Fed is expected to continue tightening. They provide higher income with relatively low duration."
Morningstar Report (2024):
"Short-term Treasury and floating-rate ETFs have seen a surge in inflows as investors rebalance for Fed hikes. ETFs with exposure to senior loans and TIPS have also seen strong demand."
Risks to Consider
Credit Risk: Especially in high-yield or senior loan ETFs.
Liquidity Risk: Some ETFs, particularly in niche segments, may have less trading volume.
Reinvestment Risk: As short-term instruments mature, new investments might offer lower returns if rate hikes slow down.
Inflation Volatility: Could affect real return, especially with nominal bonds.
Tactical Tips for Investors
Diversify Duration: Don't go all-in on ultra-short ETFs; maintain some mid-term exposure.
Ladder Bond ETFs: Consider ETFs with staggered maturities.
Review ETF Holdings: Ensure transparency and quality in bond selection.
Use Tax-Advantaged Accounts: Especially for high-yield ETFs.
Frequently Asked Questions (FAQ)
Q1: What type of bond ETFs perform best when interest rates rise?
Short-duration and floating-rate bond ETFs typically perform better during rising interest rate environments due to lower sensitivity to rate changes.
Q2: Are bond ETFs still worth investing in during rising interest rates?
Yes. While long-duration bonds may struggle, short-term and floating-rate ETFs offer stability and attractive yields in such conditions.
Q3: How do floating-rate bond ETFs protect against rising rates?
Their interest payments adjust based on benchmark rates like LIBOR or SOFR, which helps maintain value as rates increase.
Q4: What is duration, and why is it important?
Duration measures a bond’s sensitivity to interest rate changes. Lower duration means less price fluctuation when rates change.
Q5: Should I avoid long-term bond ETFs completely?
Not necessarily. Long-term bonds can offer higher yields, but they carry more interest rate risk. Balancing with short-term ETFs is often a prudent strategy.
Q6: Are TIPS ETFs a good option in a rising rate environment?
Yes, especially if inflation is also increasing. TIPS adjust principal based on inflation, providing real return protection.
Conclusion
In a rising interest rate environment, bond investors must be strategic. Floating-rate and short-duration ETFs like FLOT, BIL, and BKLN offer protection against duration risk while maintaining income potential.
Understanding the characteristics and risks of each ETF helps tailor a bond portfolio to current economic conditions. Staying informed, diversified, and focused on quality are the keys to successful bond investing in 2025 and beyond.
Citations
BlackRock ETF Data Center. https://www.blackrock.com
Charles Schwab Insights. https://www.schwab.com
Morningstar Reports. https://www.morningstar.com
Invesco BKLN Fact Sheet. https://www.invesco.com
iShares ETF Product Pages. https://www.ishares.com
SPDR BIL Fund Overview. https://www.ssga.com
U.S. Federal Reserve Economic Data (FRED). https://fred.stlouisfed.org