Market Vectors Inks Hedged Junk Bond ETF

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November 19, 2012
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Van Eck Global, the fund provider behind the Market Vectors ETFs, filed paperwork with U.S. regulators to market a high-yield corporate bond ETF that would hedge the sensitivity junk bonds have relative to interest rates through Treasurys.

The Market Vectors High Yield/Treasury Bond ETF would track a proprietary index that invests in dollar-denominated, below-investment-grade corporate bonds issued by U.S. and non-U.S. names. The fund also shorts Treasury bonds and notes to hedge against changes in interest rates—bond prices drop when interest rates rise.

The fund amounts to an attempt to hedge interest rate risk and give a purer exposure to credit risk, in a strategy that’s somewhat similar to what First Trust aims to do with an active long-short junk bond ETF it put into registration in October.

“The idea is that there is little to no benefit added for taking on interest rate risk,” IndexUniverse analyst Gene Koyfman said.

Market Vectors is the latest to look for new ways to meet investor demand for income at a time when low interest rates have compressed yields in other pockets of the fixed-income space. With interest rates pinned near zero by the Federal Reserve since the crash of 2008, conventional income-producing securities such as aggregate bond funds are shooting off paltry yields, and investors appear to be open to alternatives, including active ones.

But the company still warned that investing in junk bonds isn’t without risk, even with a Treasury hedge included.

“Hedging does not eliminate credit or interest rate risk, and may result in foregone gains if interest rates decline,” the company noted in the filing.

“The country of risk of qualifying issuers must be a member of the Group of Ten, a Western European nation, or a territory of the United States," the filing said.

Bonds must have at least one year to maturity to qualify for the portfolio, as well as a fixed-coupon schedule, the filing said. The index, which is a capitalization-weighted benchmark based on the bonds’ current amount outstanding, is rebalanced monthly.

 

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