The past two months have changed the calculus significantly for interest rate cuts this year, and we could even be looking at interest rate hikes. If that happens, monthly dividend ETFs like the iShares 20+ Year Treasury Bond BuyWrite Strat ETF (BATS:TLTW) and the Simplify Interest Rate Hedge ETF (NYSEARCA:PFIX) can surge.
Interest rate cuts were widely expected to happen in 2026, with the base case seeing 2 or more cuts by the end of this year. Surging oil prices since March have made that impossible. Pair that up with the fact that the current Fed Chair Jerome Powell won’t be leaving as expected.
The market was certain that Powell would leave when his term ended in mid-May. However, Powell stated that he is here to stay until a Justice Department investigation into Fed headquarters renovation costs is fully resolved. His board term lasts until January 2028.
All of this does not mean a rate hike is guaranteed, but there is a good chance you may see one. High oil prices can soon translate into much higher inflation.
iShares 20+ Year Treasury Bond BuyWrite Strat ETF (TLTW)
The TLTW ETF uses a covered call on the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT | TLT Price Prediction) to amplify the yield above 13%. TLT holds very long-term treasuries, so it tends to stay stable and comfortable regardless of the economic environment. It only falls when interest rate hikes are significant. If we see mild interest rate hikes in 2026, it is unlikely to hurt TLT, and I expect it to start helping ETFs like TLTW.
TLT has been treading water at the current floor price above $80, and I don’t see it going below that level anytime soon. Any hint of a stagflationary environment will spur more demand as it did in 2008. TLT surged from $90 to over $120 in 2008 due to both rising demand for safe assets and rapid interest rate cuts. A rapid rise in interest rates can hurt it, but that’s very unlikely in 2026.
But how will a surprise rate hike be good for TLTW?
TLTW is a covered-call ETF, and if we see a rate hike, it’s going to be followed up with plenty of volatility, and that’s golden for TLTW. The covered call strategy would capture higher option premiums from the increased volatility. And for the long run, we’re still looking at continued interest rate cuts.
TLTW comes with a 0.35% expense ratio.
Simplify Interest Rate Hedge ETF (PFIX)
PFIX is an active ETF that is aimed at hedging against long-term U.S. interest rates. It also benefits from spikes in fixed-income market volatility and gives you income from it. You get to hedge losses from rising interest rates and profit from market stress when bond market volatility increases.
PFIX is what you’d want to buy if you expect sustained and sharp interest rate hikes. From late 2021 to 2023, it gained nearly 200% and kept rallying while tech stocks and even retail stocks struggled. It has gone back down to the low $40s, which is similar to where it was back in late 2021 before the rally. If interest rates start rising again, I’d expect another rally to begin.
It’s a small ETF and quite under-the-radar, and you’d expect an active ETF of this size to charge more. However, expenses are also low at just 0.50%. The icing on the cake is that PFIX comes with a 10.75% yield that it distributes monthly.
Even if you don’t expect interest rates to rise significantly, it’s a nice-to-have ETF just in case. It’s one of the few assets that gain disproportionately and explosively during an interest rate hike cycle.
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