Investment Funds & Interest Rates: Historical Insights

Investing is often influenced by the prevailing economic climate, particularly interest rates. Understanding which investment funds historically perform well during varying interest rate environments can be crucial for investors looking to optimize their portfolios. Below are examples of funds that have historically thrived when interest rates drop and those that tend to fare better when interest rates rise.

Investment Funds That Perform Well When Interest Rates Drop

1. Bond Funds:

Long-Term Government Bond Funds: When interest rates decline, the prices of existing bonds typically rise. Long-term government bonds, such as those that focus on U.S. Treasuries, are considered safe investments and gain more when rates drop. Funds that invest in 10-year or 30-year U.S. Treasury bonds have historically benefitted during these periods. Examples include the Vanguard Long-Term Treasury Fund (VUSTX) or iShares 20+ Year Treasury Bond ETF (TLT).

Corporate Bond Funds: Funds that invest in corporate bonds also do well when interest rates decline. The existing bonds offer higher yields compared to new bonds issued at lower rates. Examples include the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and Vanguard Corporate Bond Fund (VCORX).

2. Dividend Growth Funds:

Companies that consistently grow their dividends tend to do well in a low-interest-rate environment as investors seek yield. Funds like the Vanguard Dividend Appreciation ETF (VIG) and Schwab U.S. Dividend Equity ETF (SCHD) often attract investors looking for income and have historically performed well during periods of declining rates.

3. High-Yield Bond Funds:

These funds focus on bonds with lower credit ratings but offer higher yields. They benefit from lower interest rates as they can refinance or issue new debt at lower costs, improving their profitability. The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) is a notable example.

4. Real Estate Investment Trusts (REITs):

REITs are often considered a great hedge against low-interest rates. When rates fall, borrowing becomes cheaper, and REITs can expand and develop new properties at lower costs. Funds like the Vanguard Real Estate ETF (VNQ) typically experience price increases during these times.

5. Growth & Technology Funds:

Vanguard Growth ETF (VUG): Top holdings like Microsoft and Apple benefit from lower discount rates on future earnings. Fidelity Blue Chip Growth Fund (FBGRX): An actively managed fund focused on companies with high growth potential

Investment Funds That Perform Well When Interest Rates Rise

1. Short-Term Bond Funds:

In a rising interest rate environment, short-term bonds are preferable as they have less duration risk and can reinvest at higher yields sooner. Funds such as the Vanguard Short-Term Bond Index Fund (VBISX) and iShares Short-Term Bond ETF (ISTB) are typically more insulated from interest rate increases.

2. Floating Rate Bond Funds:

Floating rate bonds have interest payments that periodically reset based on market rates. As interest rates rise, these payments increase, benefitting investors. Funds like the Invesco Floating Rate Fund (VFRSX) are apt for such conditions.

3. Value Stock Funds:

History shows that value-oriented funds tend to outperform growth funds in rising rate environments, as they focus on companies that are undervalued. Funds such as the Vanguard Value ETF (VTV) and SPDR S&P 500 Value ETF (SPYV) can be smart choices.

4. Financial Sector Funds:

The financial sector, particularly banks, often thrives in a higher interest rate environment since they can charge more for loans. Funds like the Financial Select Sector SPDR Fund (XLF) and Vanguard Financials ETF (VFH) typically see gains as rates rise.

5. Commodities and Commodity ETFs:

Commodities generally have a positive correlation with rising interest rates, particularly if inflation is the driving force behind the increase. Funds like the Invesco DB Commodity Index Tracking Fund (DBC) are often favorable during these periods.

Investors need to carefully consider their strategies in relation to interest rate trends. By selecting the appropriate investment funds that have historically performed well under specific interest rate conditions, investors can potentially enhance their returns while managing risk. Monitoring economic indicators and central bank policies will provide valuable insights for making informed investment decisions.

Historical data indicates that different investment funds respond uniquely to interest rate shifts.