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Six ETFs that could get smacked by rising interest rates

Here’s a six-pack of exchange-traded funds that could come under pressure when rates rise.

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We've seen so little of rising interest rates in the past few years that it's worth a review of how they affect various types of investments. Here's a six-pack of exchange-traded funds that could come under pressure when rates rise:

BMO Equal Weight Utilities Index ETF (ZUT): The utilities sector is notoriously sensitive to rising interest rates. Remember, utilities are a defensive sector that flourishes in uncertain times. If rates are rising, that signifies a growing economy.

BMO Monthly Income ETF (ZMI): A fund-of-fund ETF that contains some holdings that are vulnerable to rising rates – mid- and long-term corporate bonds, utility stocks and REITs, for example.

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iShares Core Canadian Long Term Bond Index ETF (XLB): A very strong performer in recent years thanks to its focus on long-term bonds, or those maturing in 10-plus years. When interest rates fall, you get the biggest bang for your buck from long-term bonds. But when rates rise, long-term bonds get hammered.

iShares Canadian Government Bond Index ETF (XGB): Rising rates suggest financial market conditions where the extra security from holding government bonds is less appealing. If we see a steady move higher in rates, expect corporate bonds to outperform government bonds.

Vanguard FTSE Canadian Capped REIT Index ETF (VRE): Real estate investment trusts were hit hard when expectations of higher interest rates began to grow in the summer of 2013. Borrowing costs are one of the biggest business expenses a REIT incurs. On the other hand, higher rates suggest an economy that will help increase occupancy rates and justify rent increases.

TD Canadian Aggregate Bond Index ETF (TDB): Low-cost, broadly diversified bond ETFs such as this mix short- and longer- term bonds, as well as government and corporate bonds. In a rising rate world, short-term bonds would be less volatile.

The possibility of volatility ahead doesn't by any means make these ETFs a sell. Rather, investors should adjust their holdings to make sure each fund will meet both their short- and long-term needs. For example, adding some short-term corporate bonds to TDB might make sense. An ETF such as ZUT might continue to make sense as a generator of dividend income, even if the price comes under pressure.

Video: Carrick Talks Money: Is Canada returning to an 'inflation nation'?
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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More


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