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Fund Watch

6 Best Mutual Funds for Rising Interest Rates

The Fed has held rates artificially low for years. Investors need to prepare for their inevitable rise.

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The picks below are part of Kiplinger’s Personal Finance’s annual Best List, a roundup of the best values in all the areas we cover — from funds, stocks and ETFs to credit cards and bank accounts to cars, college, kid stuff, phone plans, travel and health. Discover all our Best List picks here.

Vanguard Short-Term Investment-Grade Fund (VFSTX, yield 1.5%), a member of the Kiplinger 25, should weather a rate rise well. Its 2.6-year average duration (a measure of interest-rate sensitivity) implies that the fund’s price would fall by 2.6% if rates were to rise by one percentage point. Vanguard Short-Term Bond ETF (BSY, $81, 1.2%) is an exchange-traded fund that tracks an index of short-term bonds and charges just 0.09% per year for fees. Its average duration is 2.8 years.

Buy a floating-rate bank loan fund

Fidelity Floating Rate High Income (FFRHX, 3.8%) and PowerShares Senior Loan Portfolio (BKLN, $23, 4.6%), a member of the Kiplinger ETF 20, hold securities with “floating” interest rates. As interest rates rise, so will rates on the loans (see Get a Boost From a Floating-Rate Fund for more on these kinds of funds).

Reach for yield

Corporate junk bonds are typically less susceptible to rises in interest rates than high-quality bonds. A great choice is Vanguard High Yield Corporate (VWEHX, 4.9%). Pimco Income (PONDX, 3.7%), also a member of the Kip 25, is the best choice among funds that invest in multiple bond categories.

SEE ALSO: 25 Best Mutual Funds for Low Fees