Interest Rate Hedged Bond ETFS Rising Rates: How Short Duration Strategies Stacked Up

Two ETFs to Prepare for a Rising Rate Environment

The recent run of good economic data and the promise of a COVID-19 vaccine suggest a period of rising interest rates could be on the way. Even a minor rate increase could be a significant drag on returns in corporate bond portfolios.

Source: Bloomberg. Average performance based on quarterly changes in the 10-Year Treasury yield. Rising rate periods are any calendar quarter where the 10-Year Treasury yield increased. As of 3/31/2021, the duration of the FTSE Corporate Investment Grade (Treasury-Rate Hedged) Index was 0.04 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. The Markit iBoxx USD Liquid Investment Grade Index is designed to provide a balanced representation of the USD investment grade corporate market and to meet the investor's demand for a USD denominated, highly liquid and representative investment grade corporate index. The index represents typical duration for the broad investment grade bond market. The Bloomberg Barclays U.S. 1–5 Year Corporate Bond Index measures the investment return of U.S. dollar denominated, investment grade, fixed rate, taxable securities issued by industrial, utility, and financial companies with maturities between one and five years. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index. For IGHG's standardized returns and performance data current to the most recent month end, see Performance.



If, for example, 10-year U.S. Treasury yields rose just a half of a percent (still a low rate for 10-year yields), a typical investment-grade bond portfolio with a duration of 10 could see a five percent reduction in total return. And while short-term bond funds are an option to help reduce rate risk, they cannot eliminate it.

ProShares interest rate hedged bond ETFs, on the other hand, target zero interest rate risk. They combine portfolios of diversified corporate bonds, either investment grade or high yield, with built-in hedges against rising rates.

ProShares Investment Grade—Interest Rate Hedged (IGHG) and ProShares High Yield—Interest Rate Hedged (HYHG) follow indexes that have a history of performing well during periods of rising rates.

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 3/31/2021, the duration of the FTSE High Yield (Treasury-Rate Hedged) Index was -0.24 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. The Markit iBoxx USD Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe. The index represents typical duration for the broad high yield bond market. Bloomberg Barclays Short Term High Yield Bond (Short Duration) Index is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. Index returns are for illustrative purposes only and do not represent fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index. For HYHG's standardized returns and performance data current to the most recent month end, see Performance.

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For more information and current IGHG and HYHG performance, click here.