Mutual and exchange-traded funds are well-positioned for rising interest rates because most of their fixed income holdings are in short-term government bonds, according to Morningstar Inc.
Funds tracked by Morningstar have been increasing investment in short term bonds over the last two years, Timothy Strauts, a senior fund analyst at Morningstar, said in a webinar presentation on Wednesday.
As of December 2013 the funds in Morningstar's index are most heavily invested in intermediate-maturity government bonds, which represent 65% of the portfolios' fixed income portions. Short-term bonds make up 25%, while long-term ones represent just 10% on average.
"Most investors are reasonably positioned for a period of rising interest rates," Strauts said.
Strauts believes that funds investing in long term government bonds are taking on more risk, but doesn't anticipate a negative impact in the immediate future.
"I don't actually think rates will spike dramatically in the next 12 months," Strauts said. "So [funds investing in long term government bonds] will be fine."
Inflation, not rising interest rates, is the biggest threat to investors, Strauts said. Data provided by Morningstar shows that, so far, inflation has not risen in tandem with interest rates.
"We are unlikely to see a drastic increase in bond yields as long as this stays the same," Strauts said.
Strauss advises investors who own more stocks than bonds to consider switching to shorter duration bonds, or to diversify their fixed income holdings.
Hillary Flynn is a reporter for The Bond Buyer.