I frequently have to remind myself of the old parental axiom “it’s not bad, it’s just different” whenever I think about rising-rate environments. You can always catch a little funk in someone’s voice when they discuss Federal Reserve interest-rate hikes. That’s in part because stocks often throw short-term tantrums in response to climbing rates. Not to mention, rising rates make mortgages, auto loans, credit cards and other lending products — and thus the goods they’re used to purchase — more expensive.Yet there’s a wealth of data that shows stocks can be plenty productive no matter rates’ direction. While Fed cuts help ease lending costs for corporations and help spark big-ticket consumer spending, hikes are often a response to a hot economy in which demand is usually expanding and corporate earnings are usually rising.Still, going back to what I said originally, a rising-rate environment might not necessarily be bad, but it’s certainly different than a period of flat or declining rates … and for some investors, that might prompt a little tweaking to their playbook. With that in mind, let’s discuss a few exchange-traded funds that make sense during periods of rising rates. Rising rates … and nothing elseYou’ll frequently hear that no two bear markets are perfectly alike. While there are a variety of investments that have provided defense and even positive performance during market downturns, they don’t always act the same way because a bear market driven by, say, a financial crisis might affect sectors differently than one sparked by a tech-bubble collapse.The same goes for rate environments. The Federal Reserve literally has a “dual mandate” for both inflation and employment. That means two entirely different inputs can hold enormous sway over its monetary-policy decisions. Consider this from our David Payne, describing the circumstances around the Fed’s September 16 hike, its first in more than three years:”Chairman Kevin Warsh’s tough inflation talk at his press conference boosted long rates above 5.0%. Bond investors likely interpreted his words as a promise to raise rates more than they had expected over the next year. … The September 16 Fed policy meeting did tell us one thing about Warsh: That he has settled on conventional rate increases as his primary means of fighting inflation.”I say that to say this: If September was more than just a one-off, and we’re in for a period of rising rates, how different parts of the market respond might be different than in the past. There’s simply no way of knowing.Instead, the best we can do is consider rising interest rates in terms of their most direct effects, then look for investment products that are shielded from these mechanics … or actually benefit from them.Data is as of October 29. Dividend yields represent the trailing 12-month yield, a standard measure for equity funds. SEC yields reflect the interest earned for the most recent 30-day period after deducting fund expenses, a standard measure for bond funds. Seven-day SEC yields reflect the interest earned after deducting fund expenses for the most recent seven-day period, a standard measure for money market funds.Vanguard 0-3 Month Treasury Bill ETF(Image credit: Getty Images)Type: Ultra-short bondAssets under management: $14.3 billionSEC yield: 3.7%Expenses: 0.06%, or $6 on every $10,000 invested annuallyWe’ll start with bond ETFs, but first, a bond primer:Bond yields and bond prices move in opposite directions. If interest rates rise, the yields on existing bonds look less attractive compared to new issues, prompting investors to sell. If rates fall, the higher yields on existing issues look more attractive and draw buyers’ interest.However, that effect isn’t felt equally across the bond spectrum. An investor might not be so quick to jump ship for a higher yield if both their old bond and the new bond have, say, just one year’s worth of coupon payments to make before they expire. But that switch will look a lot sweeter if those bonds don’t mature for another 20 years. Summed up: The shorter a bond’s maturity, the less its interest-rate risk.That’s why investors who want to collect bond income but want to hedge against future Fed hikes often gravitate toward ultra-short bond funds like the Vanguard 0-3 Month Treasury Bill ETF (VBIL). This dirt-cheap Vanguard index fund currently owns 25 T-Bills with maturities between zero and three months. And U.S. Treasury debt is among the best-rated debt on the planet. This mix of sky-high credit quality and uber-short maturity translates into a duration of just 0.1 years, which implies that a 1-percentage-point rise in market interest rates would result in a mere 0.1% decline in VBIL’s net asset value (NAV), and vice versa. But while it’s very difficult for this bond fund to lose value, it also pays nearly 3.7% right now, meaning investors can come out ahead even in the face of future rate hikes.The iShares 0-3 Month Treasury Bond ETF (SGOV) is often called out to fill this need because it has roughly 10 times the assets. But VBIL’s annual expenses are 3 basis points cheaper; it’s not an enormous difference, but when you’re dealing with the thin returns of ultra-short bond ETFs, it’s still meaningful.Learn more about VBIL at the Vanguard provider site.VanEck IG Floating Rate ETF(Image credit: Getty Images)Type: Ultra-short floating-rate bondAssets under management: $3.7 billionSEC yield: 4.4%Expenses: 0.14%A traditional bond pays a fixed coupon that is set when the bond is issued. The yield you receive depends on the price at which you bought it, but the coupon itself generally doesn’t budge.But floating-rate bonds pay a coupon that’s based on a short-term benchmark — nowadays, that’s usually the Secured Overnight Financing Rate (SOFR) — plus a fixed credit spread. When the benchmark rate goes up, the coupon increases; when it goes down, the coupon decreases.You can own these securities via the indexed VanEck IG Floating Rate ETF (FLTR), which invests in roughly 450 investment-grade corporate debt issues with an average maturity of a little more than three years. That’s considerably longer than Vanguard 0-3 Month Treasury Bill’s average maturity. However, because FLTR’s components are floating rate, they have a similarly almost nonexistent duration of 0.13 years. For that marginally higher risk and just 8 more basis points in annual expenses, we get about 50 more basis points in yield … making this an ETF that should do just fine and dandy in a rising-rate environment.The flip side, of course, is that you won’t get as much out of FLTR as you would from similarly built traditional bonds in the event that interest rates decline.Learn more about FLTR at the VanEck provider site.iShares Prime Money Market ETF(Image credit: Getty Images)Type: Money marketAssets under management: $797.1 million7-day SEC yield: 3.9%Expenses: 0.20%Money market funds own low-risk, short-term debt like T-bills, commercial paper and certificates of deposit (CDs). They’re the ultimate volatility hedge, quite literally designed to remain at a $1 NAV.There’s no price upside in money-market funds, but you collect income — and when benchmark yields go up, the new debt they eventually buy will pay more, too.Money market funds have historically been the realm of mutual funds, but in early 2025, BlackRock’s (BLK) iShares division launched one in an exchange-traded wrapper.The iShares Prime Money Market (PMMF) owns U.S. government agency repurchase agreements (repos), CDs, asset-backed commercial paper and other short-term debt with an average maturity of just about 40 days.It’s not a perfect facsimile of the traditional MMF, but it’s mighty close. Rather than trading at $1, PMMF typically trades at little more than $100. During its first year or so, its prices ranged between $100.04 and $101.40 — a band of about 1%. But since about April 2026, its band has tightened to between $100.23 and $100.37, which is a much thinner 0.14% spread and a negligible amount of volatility. Meanwhile, you can collect almost 4% at today’s prices.And unlike a mutual fund, there’s no required minimum investment threshold. If you can afford a single share — or less, if your brokerage offers fractional shares — you’re in.Learn more about PMMF at the iShares provider site.State Street SPDR S&P Regional Banking ETF(Image credit: Getty Images)Type: Regional bank stockAssets under management: $4.0 billionDividend yield: 2.3%Expenses: 0.35%Bonds aren’t the only option for leveraging higher interest rates. You can make hay with a few areas of the stock market, too.Financial stocks and bank ETFs are popular choices when interest rates are on the rise. Banks, after all, make much of their income from the spread between the interest they charge on products such as mortgages and auto loans, and what they pay out to depositors via savings and other accounts. This is called the net interest margin, or NIM.When rates rise, sure, a bank will offer higher yields on savings and money market accounts, but they’ll typically boost what they charge on loans by even more, further boosting their NIM.That’s the logic behind owning funds such as the State Street SPDR S&P Regional Banking ETF (KRE), an index fund that owns predominantly mid- and small-cap regional banks. Holdings include the likes of Montana-based Glacier Bancorp (GBCI), New Jersey’s Valley National Bancorp (VLY) and online banking specialist Axos Financial (AX).Why regionals? Local banks largely stick to many of the rate-tied business lines I mentioned above, whereas Big Four banks and super-regionals tend to have additional businesses such as trading desks and global wealth management that aren’t as directly tethered to interest rates.And unlike bonds, regionals provide both a decent amount of income (more than 2% in yield as I write this), as well as the much more significant upside potential that comes with owning equities.Even then, there are risks to using regional banks as a rate play. Too-aggressive hiking can depress lending activity. And competitive environments for customer deposits can depress banks’ margins.Learn more about KRE at the State Street Investment Management provider site.Simplify Interest Rate Hedge ETF(Image credit: Getty Images)Type: TradingAssets under management: $256.3 millionDividend yield: 1.9%Expenses: 0.50%If you’re tired of all this subtlety, you’re probably ready to hear about the Simplify Interest Rate Hedge ETF (PFIX).This is a complex trading fund that uses over-the-counter derivatives to create performance similar to what you’d get by owning long-dated put options on 20-year U.S. Treasuries. (Buying a put option is a wager that the underlying asset’s price will decline.)Note that I said “20-year U.S. Treasuries.” While the other four ETFs I mentioned are primarily influenced by shorter-term rate moves, PFIX is a hedge against rising long-term rates. Yes, the Fed’s rate policy can eventually bleed down to longer-term debt, but many other factors — inflation expectations, economic growth, Fed balance-sheet actions such as quantitative easing/tightening — exert influence, too.Still, Simplify’s ETF is effective at what it does. The 20-year Treasury’s rate has bubbled up from about 4.8% at the start of the year to 5.3% recently. PFIX has delivered a 21% total return (price plus dividends) during that time, outdoing the S&P 500.Learn more about PFIX at the Simplify provider site.Related contentFed Rate Hike: What to Do With Your Money NowMortgage Rates Are Rising: What Homeowners Should Do NowBest Stocks to Buy for Rising Interest Rates5 Stocks to Avoid as Interest Rates RiseThe Best Inflation-Proof Investments for Your Portfolio
