Central banks in Canada and the U.S. have raised interest rates very aggressively over the last year to fight soaring inflation, putting a significant amount of strain on borrowers. But high interest rates have a silver lining: they give savers and savvy investors a great opportunity to boost their return potential.
Here are five ways you can take advantage of high interest rates:
- Mutual funds or ETFs with a focus on bank
stocks. Banks usually generate more profit as the spread increases between the interest they pay to lenders and the interest they charge borrowers. When market rates are low, there’s less ability to widen spreads.
- Energy-focused mutual funds or ETFs. Inflation lifts the price of most products, including energy. While other factors (like supply and demand) also influence energy prices, oil and gas prices are being well supported during this
period of high inflation, so energy-focused mutual funds or ETFs might be worth a look.
- Mutual funds or ETFs focused on the consumer staples sector. Some companies can pass along higher costs to consumers without any meaningful reduction in sales and profitability. Many such companies (e.g., grocers, drugstores) are
in the consumer staples sector.
- Floating-rate income mutual funds or ETFs. Yields on floating-rate debt instruments rise (or decline) when interest rates go up (or down), so mutual funds or ETFs that provide exposure to these securities may be a good choice in a
rising-rate environment.
- Real return bond mutual funds or ETFs. Issued by the government, real-return bonds are pegged to the Consumer Price Index (CPI), which tracks the inflation rate of key goods and services. They pay interest based on the CPI, so mutual
funds or ETFs focused on real return bonds may help protect investors against inflation.
Speak with your advisor to learn more about how your investments can be positioned for today’s high-interest-rate environment.
For definitions of technical terms in this piece, please visit iaclarington.com/glossary and speak with your investment advisor.
The information provided should not be acted upon without obtaining legal, tax, and investment advice from a licensed professional. Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with mutual fund investments, including investments in exchange-traded series of mutual funds. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
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