ProShares Launches Hedged Junk Bond ETF

May 23, 2013

The third competitor in a growing field of hedged junk bond funds comes to market.

ProShares, the purveyor of “alternative” exchange-traded funds, today is launching a high-yield corporate debt ETF that will take short positions in U.S. Treasurys as a hedge. It will be the third—and least expensive—entrant in a growing field of yield-seeking junk bond funds with hedges.

The ProShares High Yield-Interest Rate Hedged ETF will have its primary listing on the BATS exchange and trade under the symbol “HYHG.” It will come with an annual expense ratio of 0.50 percent, or $50 for each $10,000 invested—again, less costly than two competing funds from Van Eck and First Trust.

The three high-yield corporate bond funds, each in its own way, will short Treasurys to offset their exposures to high-yield corporate debt. The marketing of the strategies amounts to a sign fund sponsors are eager to address anxiety that already-paltry bond yields could morph into a disastrous rout if bond investors have to ride out a sell-off as the economy recovers and interest rates head higher.

“By taking these short positions, the Index seeks to mitigate the potential negative impact of rising Treasury interest rates (“interest rates”) on the performance of high yield bonds (conversely limiting the potential positive impact of falling interest rates),” Bethesda, Md.-based ProShares said in the most recent registration statement it filed detailing HYHG.

ProShares, which is the world’s biggest purveyor of leveraged and inverse ETFs, is pricing HYHG with a 50-basis-point fee waiver, helping to undercut its competitors.

A Lower Expense Ratio

The First Trust High Yield Long/Short ETF (NasdaqGM: HYLS) was launched in late February and has a total expense ratio of 1.19 percent a year. That consists of 0.95 percent in management fees, 0.23 percent leverage costs and 0.01 percent in acquired funds fees. HYLS has gathered just over $23 million in assets.

The Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY) came to market on March 22, and costs 1.45 percent a year after a fee waiver. That includes 45 basis points in management fees, 95 basis points in interest on securities sold short and cost to borrow, and 11 basis points in “other expenses.” The fund has attracted $10.2 million.

ProShares is the No. 6 U.S. ETF sponsor, with just over $24.52 billion in assets, according to IndexUniverse’s latest daily “ETF League Table.”

Total U.S.-listed ETF assets are meanwhile at around $1.534 trillion, according to data compiled by IndexUniverse.


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