The traditional 60/40 portfolio is facing a fresh test as rising oil prices and Treasury yields put pressure on both stocks and bonds.
U.S. crude rose 5.8% to $90.75 a barrel Tuesday, while Brent climbed 5.2% to $95.20 as renewed U.S.-Iran tensions raised concerns about supply disruptions. Meanwhile, the 10-year Treasury yield reached 4.798%, its highest level since January 2025, before settling around 4.77%. Markets now price in a 68% probability of a September Federal Reserve rate hike, up sharply from before Fed Chair Kevin Warsh’s recent comments.
The combination is particularly challenging for long-duration bonds and expensive growth stocks. The Nasdaq 100 fell 1.29% Tuesday, while the S&P 500 declined 0.7%.
Short-Term Treasuries Gain Appeal
Higher rates can make short-duration Treasury ETFs more attractive because they carry far less interest-rate risk than long-term bonds.
The iShares 0-3 Month Treasury Bond ETF (NYSE:SGOV) has nearly $106 billion in assets and offers a 3.61% 30-day SEC yield. Its portfolio consists of Treasury bills maturing in three months or less, giving it minimal interest-rate sensitivity.
The contrast with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is stark. TLT offered a 5.12% SEC yield, but its 14.94-year effective duration leaves it highly sensitive to further increases in long-term yields. The fund is down almost 7% year to date.
Energy ETFs Offer a Different Hedge
Energy equities could provide another way to navigate an oil-driven inflation shock.
The Energy Select Sector SPDR ETF (NYSE:XLE) has $41.4 billion in assets and is up about 45% year-to-date. The fund provides targeted exposure to large U.S. energy companies, with ExxonMobil Holdings Corp (NYSE:XOM) and Chevron Corporation (NYSE:CVX) among its biggest holdings.
For a broader and more concentrated oil-sector play, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) has nearly $3.94 billion in assets. Its portfolio is 63.7% exploration and production companies and 29.2% refining and marketing companies.
TIP Adds Inflation Protection
Investors worried that higher energy prices could keep inflation elevated can also consider the iShares TIPS Bond ETF (NYSE:TIP). The fund holds Treasury Inflation-Protected Securities, whose principal adjusts with changes in the Consumer Price Index.
The broader takeaway is that the traditional 60/40 mix faces a tougher environment when inflation pushes both bond yields and equity risk higher. Short-duration Treasuries, energy equities and inflation-linked bonds offer different ways for ETF investors to diversify that risk.
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