iShares has rolled out two interest-rate-hedged bond ETFs targeting emerging markets and domestic credit bonds. The iShares Interest Rate Hedged Emerging Markets Bond ETF (EMBH) and the iShares Interest Rate Hedged 10+ Year Credit Bond ETF (CLYH) are described as “actively managed” in their prospectuses, but at the same time, they will invest primarily in unhedged iShares ETFs—namely, the $5.4 billion iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB | B-60) and the $753 million iShares 10+ Year Credit Bond ETF (CLY | B-87), respectively.
To hedge interest rates, the funds will take short positions in U.S. Treasury futures and interest rate swaps, and possibly in other interest-rate futures, according to both prospectuses. And while the funds will invest the bulk of their assets in their unhedged index-based counterparts, they can also invest in other ETFs, as well as a variety of derivatives, contracts and other investment vehicles.
Essentially, the funds aim for a net-zero portfolio duration that eliminates interest-rate risk. Although interest rates remain low, investors have long anticipated an increase, so funds that hedge out interest-rate risk could have a lot of appeal in the near future.
iShares already has two such funds trading: the iShares Interest Rate Hedged High Yield Bond ETF (HYGH | C-44), which has $106 million in assets and invests primarily in the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-64), and the iShares Interest Rate Hedged Corporate Bond ETF (LQDH | C-32), which has less than $20 million in assets and invests primarily in the $21 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-77). It looks like iShares’ plan is to offer investors interest-rate-hedged versions of all of its biggest bond funds as the prospect of rising interest rates looms large.
Deutsche Bank and ProShares also offer fixed-income ETFs that hedge away the impact of interest rates.
More Firms File For ETMFs
More firms have filed exemptive relief requests to launch exchange-traded managed funds under Eaton Vance’s “NextShares” umbrella. This time around, those firms include Ivy Investment Management, a subsidiary of Waddell & Reed Financial, and well-known ETF provider ALPS. That brings the number of firms that have filed with the Securities and Exchange Commission to launch funds using Eaton Vance’s patented structure to roughly 10.
The filing from Ivy Investment Management lists three initial funds. The Ivy Asset Strategy NextShares will invest in a wide variety of asset classes, while the Ivy International Core Equity NextShares will target equities in developed European and Asia-Pacific markets. The Ivy Science and Technology NextShares will be a global fund that targets science and technology stocks.
The ALPS filing details plans for just one initial fund, the ALPS Red Rocks Listed Private Equity NextShares fund, which will basically invest in companies around the world that primarily invest in other, private companies. Red Rocks is the firm behind the index underlying the $481 million PowerShares Global Listed Private Equity Portfolio (PSP | F-74).
However, the Wall Street Journal reported on Tuesday that Eaton Vance Corp.’s shares were downgraded to a neutral rating by Credit Suisse largely on concerns that the launch of the funds would not be successful. Those concerns appeared to center around the funds launching in a timely manner, distribution issues and having the infrastructure in place to support them.
The Journal noted that Stephen Clarke, the president of Navigate Fund Solutions, Eaton Vance’s subsidiary in charge of the NextShares, has said that the first launches are planned for this year, but dependent on SEC approval, having enough firms involved to reach “critical mass” and the ability of the Nasdaq to support the products by its projected readiness date of Oct. 1.
A total of 10 firms have filed exemptive relief requests to launch funds using the NextShares structure. Beyond the two recent filings, they include Pioneer, Broms Asset Management, Principal, Victory Capital, Hartford Funds, American Beacon, Nile Capital and Gabelli. And of course, Eaton Vance has filed to launch its own ETMFs.
Just as a refresher, ETMFs are funds that use a NAV-based trading approach developed by Gary Gastineau. Unlike standard ETFs, the ETMFs will be nontransparent and disclose their holdings about as often as traditional mutual funds do. ETFs, even the actively managed ones, are considered transparent and disclose their holdings on a daily basis.