Investors share strategies to beat interest rate fears — including one that trumped the 60/40 model
Markets are jittery now that fears that interest rates will stay higher for longer have been reignited . Stocks tumbled on Tuesday and the 2-year Treasury yield jumped to 5%, its highest level since 2007 . How should investors trade in such an uncertain market? Here’s what BlackRock and other pros say. Barbell strategy in these bond ETFs The hawkish commentary from the U.S. Federal Reserve and personal consumption expenditures data have “forced investors to confront the sobering truth,” said Gargi Chaudhuri, head of iShares Investment Strategy at BlackRock. That is, rates are going to stay “higher for longer,” she said. “As imminent policy rate cuts are priced out and the long end of the Treasury curve creeps over 4%, rates have finally risen high enough, in our view, to provide an appropriate entry point,” she wrote in a March 7 note. BlackRock recommends barbelling an overweight allocation in short-duration fixed income, with allocations to longer-duration, high quality fixed income for the moment. A barbell strategy in bonds involves purchasing short-term and long-term bonds, but not intermediate-term bonds. These are BlackRock’s recommendations: Short-duration fixed income: iShares 0-3 Month Treasury Bond ETF, iShares Short Treasury Bond ETF, and iShares Treasury Floating Rate Bond ETF. Longer-duration fixed income: iShares TIPS Bond ETF, iShares Core U.S. Aggregate Bond ETF and iShares MBS ETF. Consider these stock types BlackRock said it doesn’t believe investors would be sufficiently rewarded by “aggressive” allocations to stocks, given that 6-month Treasury bills are yielding over 5% and the S & P 500 is hovering at 4,000. “While we do not suggest investors abandon stocks all together, in a “higher for longer” environment, we believe investors should gravitate towards value-style stocks,” Chaudhuri said. Such value-oriented stocks could take the form of equity ETFs such as the iShares MSCI USA Value Factor ETF, iShares Russell 1000 Value ETF and the iShares Core High Dividend ETF. Bonds may have become more attractive as Treasury yields approach their highest levels in a decade, but certain top dividend-paying stocks also provide competitive payoffs to investors. Read more here (CNBC Pro used FactSet data to screen for the largest 1,500 stocks listed in the S & P with yields above 4% — better than the 10-year Treasury note.) This strategy beat the ’60/40′ model 2022 was the worst year the traditional “60/40” portfolio (a model in which investors put 60% of their money in stocks and 40% in bonds) had since 1926 . It has so far gained 6.2% in January — although that was when markets were rallying. One strategy stands out for having beaten the 60/40 mix last year, when markets were down, and even during the market rally in 2020, according to Wells Fargo Investment Institute. That’s the equity hedge strategy, in which investors earn positive returns by both buying stocks that do well and selling short stocks that are doing poorly. “2020 and 2022 were years equity hedge funds generated value through managing exposure dynamically,” said the firm’s strategists in a March 6 note, adding that the ability to “dynamically adjust their exposure” using leverage and various hedging methods can “prove advantageous in difficult markets.” “We believe that conditions may be setting up to potentially benefit the Equity Hedge strategy in the future,” they said, adding that the return to higher interest rates may widen the gap between strong and weak companies. That will allow fund managers with better stock-picking skills to exploit the disparity, Wells Fargo pointed out. — CNBC’s Hakyung Kim contributed to this report.
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