Chasing Yields in a Falling Interest Rate Environment

The steady climb of interest rates in 2022 and 2023 was felt differently for borrowers and savers. For those seeking to purchase a home, or a small business aiming to secure new financing and refinance maturing debt, the cost of capital increased as the Federal Reserve embarked on aggressive rate hikes. On the flip side, investors who had spent well over a decade earning next-to-nothing on fixed-income securities, like U.S. Treasury bonds, could suddenly earn a roughly 5% annual yield, risk-free.¹

“Risk-Free” Yield as Measured by the 3-month U.S. Treasury Bond Yield

The interest rate environment is set to shift once again.

A Better Way Forward for Passive Investors

Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.

Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:

• Targeted asset allocation
• Automatic diversification
• Built-in discipline
• Simplified investing – with low fees!

Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds. ³

With the Fed’s recent move to lower the benchmark fed funds rate by 50 basis points, and indications that more cuts could come before the end of the year, savers are increasingly wondering: are the days of attractive risk-free yields coming to an end?

At Zacks Advantage, we take an active approach to fixed-income investment, keeping in mind expectations for the future path of interest rates. In the second quarter, for instance, we shortened the duration of our fixed-income portfolio and invested more in traditionally safer holdings, like Treasuries. With yields falling and spreads tightening, we did not see much added value in being further out on the risk curve.

As interest rates pull back in the Fed’s monetary policy pivot, investors who had just gotten accustomed to 5+% yields may increasingly search for ways to preserve attractive risk-free returns. This brings us to the key point we want to make in this article: use caution when chasing yield in a falling interest rate environment.

An example of one such peril comes in the form of an entity called Yield Wealth, which was recently reported in the Wall Street Journal. Yield Wealth had been advertising 10-year “term deposits” that offered annual yields of 17.1%, which is over three times what the current money market and short-duration Treasurys pay. These “term deposits” were also said to be insured up to $10 million, which is well higher than the $250,000 of bank deposits protected by the FDIC. According to some of Yield Wealth’s advertisements, investors could earn “Colossal Yields Without the Risk,” adding that “any interest you earn is ‘locked in’ and can’t be lost.”

Journalists at the Wall Street Journal inquired. Almost immediately, advertisements for Yield Wealth products were removed, and the company has now been dissolved without taking a single customer deposit. In a private placement memorandum dated March 20, 2024, Yield Wealth wrote that its term deposit product involved “substantial risk” with investors possibly encountering a “total loss of their investment.” Turns out that “Colossal Yields Without the Risk” was not on offer, after all.

Bottom Line for Investors

As interest rates potentially tick lower in the coming months and quarters, investors who wish to preserve attractive yields may start to browse the marketplace in search of new options. Our message here: exercise caution.

Businesses like Yield Wealth may spring up with products offering attractive yields with little to no risk, understanding that investor demand for such products is likely to grow in a falling interest rate environment. An old rule of thumb may apply in most cases: if it sounds too good to be true, it probably is.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:

• Invests exclusively with ETFs
• Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
• Lowers fees and expenses

Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.

Download our FREE Guide⁴

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¹ Wall Street Journal. August 30, 2024.

² Fred Economic Data. September 27, 2024.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion..

⁴ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion..

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