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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

ETFs for a Rising Rate Environment

NEW YORK (FMD Capital Management) -- One of the biggest conundrums income investors face heading into 2014 is how to anticipate a move in interest rates. Nearly every week we get more economic data that seems to support the dreaded "taper" scenario of the Fed easing off the bond buying gas pedal. In addition, we are swiftly approaching a new era of Federal Reserve leadership under Janet Yellen, who will be tasked with reading the tea leaves with respect to timing the Fed's exit strategy.

With so many factors in play, it's time to consider whether we will see a break higher or lower in rates next year and how that will impact both bonds and stocks. I want to focus on how to position your portfolio to insulate yourself from these risks while still taking advantage of income opportunities.

A quick look at the 10-Year Treasury Note Yield shows that it is drifting back towards the top end of its range since hitting a high in September. This has put pressure on assets with the highest sensitivity to interest rates such as treasury bonds, REITs, and high-grade corporate bonds.

Noted fixed-income managers Bill Gross and Jeff Gundlach have taken an agnostic view about where interest rates are headed, and I tend to agree with that belief in the short-term. As a trend follower, I have been advocating selling long-duration securities in favor of shorter-duration holdings with a risk management mindset. I am focusing my fixed-income exposure in ETFs and mutual funds that have an overweight allocation to high yield, bank loans and other performing sectors.

I think it makes sense to diversify your exposure to areas of the market that offer alternative dividend streams or enhanced value propositions. One of my favorite equity income ETFs that does this is the First Trust NASDAQ Technology Dividend Index (TDIV). I like this fund because it gives you exposure to a subset of technology stocks that are focused on returning value to shareholders through cash dividends. The current 30-day SEC yield is 2.51% and distributions are paid on a quarterly basis.

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