Rising Rates:
React, Don’t Overreact

Key takeaways

The US Federal Reserve (Fed) is not done: After raising short-term interest rates in December 2015 for the first time in nearly a decade, the Fed is poised to continue on a course of gradual rate hikes.

This is no ordinary rate cycle. The Fed is “normalizing” rates from their extraordinarily low post-financial crisis levels. As a result, we expect rates to rise slowly, remaining below historical averages for some time. The persistent low-yield environment means balancing income needs and risk is as important and challenging as ever.

Still, rising rates are a sign of a strengthening, growing economy –for well-prepared investors, rising rates can signal opportunity.

With a simple strategy to soften the impact of rising rates on your bond portfolio, while seeking opportunity in well-positioned equity sectors, investors may potentially capture opportunity presented by rising rates. Learn more below.

Ready for Rising Rates?

Prepare your Bond Portfolio

Focus on credit-driven returns with lower interest rate sensitivity.

Seek a better balance of risk and reward by focusing on credit risk (the risk that the issuer will default) over interest rate risk. Reducing your interest rate risk by shortening the duration of your bonds, while increasing credit exposure, may potentially help manage the impact of rising rates.

Investors may want to consider iShares ETFs for short duration credit funds and floating rate funds as part of their rising rates strategy.

iShares 1-3 Year Credit Bond ETF (CSJ) iShares 1-3 Year Credit Bond ETF

Short-term U.S. investment grade credit (corporate and non-corporate bonds)
(Tracks the Barclays U.S. 1-3 Year Credit Bond Index)

iShares Floating Rate Bond ETF (FLOT) iShares Floating Rate Bond ETF

Corporate bonds whose interest payments adjust to reflect changes in interest rates

iShares Short Maturity Bond ETF (NEAR) iShares Short Maturity Bond ETF

Seeks to maximize income through diversified exposure to short-term bonds

Seek Equity Opportunities

Focus on well-positioned sectors
in a rising rate cycle

Consider focusing on sectors with well-capitalized companies which have the potential to sustainably grow through a rising rate cycle. We believe that U.S. financials and U.S. technology are reasonably valued cyclical sectors that may benefit from a strengthening U.S. economy.

Funds such as the following may provide opportunities in a rising interest rate cycle:

IYW iShares U.S. Technology ETF

Information technology stocks

IYG iShares U.S. Financial Services ETF

Domestic bank and financial services stocks
(no REIT exposure)

DGRO iShares Core Dividend Growth ETF

Stocks that are screened for sustainability of dividend growth and are diversified across industries

Hedge interest rate risk

For bond investors who believe interest rates may rise quickly in the near-term, consider iShares interest rate hedged ETFs. These funds are an easy and cost-effective way to potentially hedge interest rate risk and provide access to focused credit exposure.

Learn more

Navigating rising
interest rates

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Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares ETF and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

There is no guarantee that dividends will be paid.

Actively managed funds do not seek to replicate the performance of a specified index. Actively managed funds may have higher portfolio turnover than index funds.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. The Fund’s income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates.

There is no guarantee that interest rate risk will be reduced or eliminated within the Fund.

Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This document contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

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