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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.

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.

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Kiplinger's Best List, 2016

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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.

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