When interest rates are climbing, traditional long-term bond funds can struggle. That’s why investors often look for bond funds designed to perform better in rising-rate environments. Think short-duration bonds, floating-rate notes, inflation-protected securities, and actively managed strategies. If you’re building a resilient income portfolio, these top bond funds for rising interest rate environments deserve a closer look.
1. Vanguard Short-Term Bond ETF (BSV)
The Vanguard Short-Term Bond ETF (BSV) is a go-to option when rates are rising because it focuses on short-duration, investment-grade bonds. With an average maturity of one to five years, BSV is less sensitive to interest rate hikes compared to long-term bond funds. Investors appreciate its low expense ratio and broad diversification across U.S. government and corporate bonds. In a rising rate environment, shorter maturities help reduce price volatility, making BSV a solid defensive choice for conservative investors seeking stability and modest income.
2. iShares Floating Rate Bond ETF (FLOT)
Floating-rate bonds can shine when rates increase, and the iShares Floating Rate Bond ETF (FLOT) is built for that purpose. It invests in investment-grade floating-rate notes whose interest payments adjust as benchmark rates rise. That means your income can increase alongside interest rates. With minimal duration risk and strong liquidity, FLOT is popular among investors looking to park cash while still earning competitive yields. In volatile rate environments, its structure helps cushion price swings compared to traditional fixed-rate bond funds.
3. SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
For ultra-conservative investors, SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) offers near-zero duration exposure. It invests in very short-term U.S. Treasury bills, which quickly reset to higher yields as rates climb. While it doesn’t provide high income compared to riskier bond funds, it offers strong capital preservation and minimal volatility. In rising interest rate environments, BIL acts almost like a high-yielding cash alternative, making it ideal for investors seeking safety and flexibility.
4. Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
Inflation often accompanies rising interest rates, and Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) addresses both risks. It invests in short-term Treasury Inflation-Protected Securities (TIPS), which adjust principal value based on inflation. Because it focuses on short maturities, VTIP limits duration risk while providing inflation protection. Investors who want a hedge against rising prices and rate hikes often turn to VTIP for balanced exposure. It’s a strategic option for maintaining purchasing power without taking excessive interest rate risk.
5. PIMCO Enhanced Short Maturity Active ETF (MINT)
PIMCO Enhanced Short Maturity Active ETF (MINT) is an actively managed short-duration bond fund designed to navigate rate cycles. Managed by the experienced team at PIMCO, MINT invests in high-quality corporate bonds, asset-backed securities, and other short-term debt instruments. Its flexible approach allows managers to adjust duration and credit exposure as interest rates shift. In rising-rate environments, this active strategy can help mitigate downside risks while still delivering competitive income, making it attractive for investors seeking a slightly higher yield than cash equivalents.
6. iShares Short Treasury Bond ETF (SHV)
iShares Short Treasury Bond ETF (SHV) provides exposure to short-term U.S. Treasury securities with maturities of less than one year. Its extremely low duration makes it less sensitive to interest rate increases. As rates rise, the fund can quickly reinvest maturing bonds at higher yields. SHV is commonly used by investors who prioritize safety and liquidity. While returns may be modest, its stability and minimal credit risk make it a reliable option during tightening monetary cycles.
7. Fidelity Floating Rate High Income Fund (FFRHX)
For investors willing to accept higher credit risk in exchange for potentially higher yields, Fidelity Floating Rate High Income Fund (FFRHX) focuses on senior floating-rate loans. Because these loans have variable interest payments, income can rise along with benchmark rates. Additionally, senior loans typically sit higher in a company’s capital structure, offering some protection in downturns. In rising interest rate environments, FFRHX can outperform traditional bond funds, although it may experience more volatility during economic slowdowns.
8. Schwab Short-Term U.S. Treasury ETF (SCHO)
Schwab Short-Term U.S. Treasury ETF (SCHO) invests in U.S. Treasuries with short maturities, typically one to three years. This moderate short duration helps limit price declines when interest rates rise. SCHO combines government-backed security with a low expense ratio, appealing to cost-conscious investors. It strikes a balance between yield and safety, making it a practical solution for investors who want steady income without excessive exposure to long-term rate risk.
9. Invesco Senior Loan ETF (BKLN)
Invesco Senior Loan ETF (BKLN) offers exposure to floating-rate senior loans, which benefit directly from rising short-term interest rates. As rates climb, coupon payments typically increase, helping offset rate-related price pressure. BKLN can provide attractive income in tightening cycles, but investors should be mindful of credit risk and economic conditions. For those seeking diversification beyond traditional bonds, BKLN can serve as a strategic allocation within a broader income portfolio.
10. Vanguard Ultra-Short Bond ETF (VUSB)
Vanguard Ultra-Short Bond ETF (VUSB) targets very short-duration, high-quality bonds to reduce interest rate sensitivity. It aims to deliver higher income than money market funds while maintaining limited volatility. With a diversified portfolio and disciplined credit selection, VUSB offers a middle ground between cash and traditional bond funds. In rising-rate environments, its ultra-short duration helps preserve capital while allowing investors to reinvest at higher yields as bonds mature.
Conclusion
Navigating rising interest rate environments requires thoughtful bond selection. Short-duration funds, floating-rate strategies, and inflation-protected securities can help reduce rate sensitivity while maintaining income potential. Whether you prioritize capital preservation or higher yield, these top bond funds for rising interest rate environments provide practical options for building a resilient, diversified portfolio in today’s changing rate landscape.