Interest Rate Hedged Bond ETFs
How High Yield Bond Investments Have Stacked Up
To prepare for rising interest rates, many investors move to short-term bond funds. This helps reduce their interest rate risk, but it doesn’t eliminate it. There is, however, a way to virtually eliminate interest rate risk—with interest rate hedged bond funds.
ProShares High Yield—Interest Rate Hedged (HYHG) tracks the Citi High Yield (Treasury Rate-Hedged) Index, a diversified portfolio of high yield bonds with a built-in hedge against interest rate risk. The index maintains exposure to credit opportunities as a primary source of return (remember, high yield bonds are higher risk). The portfolio’s hedge is designed to alleviate the drag on return when interest rates rise. The index has a history of performing well during periods of rising rates.
HYHG's Index Outperformed Typical- and Short-Duration Bond High Yield Index When Rates Rose
Source: Bloomberg. Average performance based on quarterly changes in the 5-Year Treasury yield. Rising rate periods are any calendar quarter where the 5-Year Treasury yield increased. As of 12/31/16, the duration of the Citi High Yield (Treasury-Rate Hedged) Index was 4.4 years. Duration is a measure of a fund’s sensitivity to interest rate changes, reflecting the likely change in bond prices given a small change in yields. Higher duration generally means greater sensitivity.
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Short-term bond funds are not the only answer to rising rates. Another—perhaps better—way to remain invested in bonds is to remove the interest rate risk entirely with a built-in hedge. If rates continue to rise, now may be a good time to prepare with an interest rate hedged bond ETF.