ProShares: The Shortcomings Of Short Term Bond Funds

June 12, 2017

[This ETF Industry Perspective is sponsored by ProShares.]

Bond prices fall when interest rates rise. So when interest rates are trending up, many investors shift their fixed-income holdings to short-term bonds in order to reduce interest rate risk. What they may not realize is that, by doing so, they shortchange their potential returns in two ways:

  • First, moving to short-term bonds reduces interest rate risk but it doesn’t eliminate it. Short-term bonds still have rate risk.
  • Second, short-term bonds have less exposure to credit opportunities (and of course, risk), a key driver of bond returns.

An alternative approach is to seek to eliminate interest rate risk while maintaining full exposure to credit opportunities. This is what an interest-rate-hedged strategy aims to do. It’s important because, when rates rise, credit spreads have typically tightened and boosted returns.

An Interest-Rate-Hedged Strategy Maintains Full Exposure to Credit Risk/Opportunity

A Better Way To Prepare?

The ProShares Investment Grade—Interest Rate Hedged (IGHG) tracks the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, which offers a diversified portfolio of investment-grade long-term bonds with a built-in interest rate hedge. IGHG maintains full exposure to credit risk as a primary source of return, while the hedge is designed to alleviate the impact of rising rates.

The Takeaway

Short-term bond funds help investors reduce their interest rate risk, but they have shortcomings. If you’re looking for a potentially better solution for rising rates, consider an interest-rate-hedged bond ETF like IGHG.

When Interest Rates Rose, IGHG's Index Outperformed a Short-Duration Bond Index

Source: Bloomberg, December 2013–March 2017. 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 3/31/17, the duration of the Citi Corporate Investment Grade (Treasury-Rate Hedged) Index was 10.18 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 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 1 and 5 years.

Click here for fund performance.

Simeon Hyman, CFA, leads ProShares' investment strategy team engaged in analysis, product research and development, education, and the delivery of investment strategies using ProShares ETFs. Prior to joining ProShares, he served at Bloomberg as chief investment officer for its technology-driven wealth management business, BloombergBlack. Mr. Hyman earned bachelor's and master's degrees in economics from the University of Connecticut and an MBA from Columbia Business School. He holds Series 7, 24, 63 and 66 FINRA registrations and the Chartered Financial Analyst designation.


Investing involves risk, including the possible loss of principal. These ProShares ETFs entail certain risks, which include the use of derivatives (future contracts), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Please see summary and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its investment objective.

IGHG does not attempt to mitigate factors other than rising Treasury interest rates that impact the price and yield of corporate bonds, such as changes to the market’s perceived underlying credit risk of the corporate entity. IGHG seeks to hedge investment grade bonds against the negative impact of rising rates by taking short positions in Treasury futures. These positions lose value as Treasury prices increase. The short positions are not intended to mitigate credit risk or other factors influencing the price of the bonds, which may have a greater impact than rising or falling interest rates. Investors may be better off in a long-only investment-grade investment than investing in IGHG when interest rates remain unchanged or fall, as hedging may limit potential gains or increase losses. No hedge is perfect. Because the duration hedge is reset on a monthly basis, interest rate risk can develop intra-month, and there is no guarantee the short positions will completely eliminate interest rate risk. Furthermore, while IGHG seeks to achieve an effective duration of zero, the hedge cannot fully account for changes in the shape of the Treasury interest rate (yield) curve. IGHG may be more volatile than a long-only investment-grade bond investment. Performance of IGHG could be particularly poor if investment-grade credit deteriorates at the same time that Treasury interest rates fall. There is no guarantee the fund will have positive returns.

Bonds will decrease in value as interest rates rise.

Short positions in a security lose value as that security's price increases.

Narrowly focused investments typically exhibit higher volatility.

Shares of these funds are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns.

Past performance does not guarantee future results.

"CITI" is a trademark and service mark of Citigroup Inc. or its affiliates, is used and registered throughout the world, and has been licensed for use by ProShares. ProShares ETFs based on the "Citi Corporate Investment Grade (Treasury Rate-Hedged) Index" or "Citi High Yield (Treasury Rate-Hedged) Index" are not sponsored, endorsed, sold or promoted by Citigroup Index LLC ("Citi Index") or its affiliates (collectively, "Citigroup"), and they make no representation regarding the advisability of investing in ProShares ETFs. CITI INDEX MAKES NO EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall Citigroup be liable for any direct, indirect, special or consequential damages in connection with any use of the "Citi Corporate Investment Grade (Treasury Rate-Hedged) Index" or "Citi High Yield (Treasury Rate-Hedged) Index."

Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.

ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.


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