Bond ETFs For Rising Interest Rates

June 12, 2014

Duration-hedged ETFs offer some protection.


Fixed Income Risk Spectrum and Table

Investors must bear risk to gain reward. In the bond market, those risks are largely summarized by interest-rate risk and credit risk. The more investors hold of each, the more likely they are to earn higher returns. However, the prospect of rising interest rates has scared investors away from duration and toward the short end of the yield curve—where the negative effects of rising rates are minimized.

Fortunately, ETF product innovation took a crucial step last year when we saw the first duration-hedged ETFs come to market. These ETFs take long positions in corporate bonds (credit risk and interest-rate risk) and overlay a short position of U.S. Treasurys (interest-rate risk only). Investors are left with near-pure credit exposure. The result is that investors can maintain their fixed-income exposure without worrying about rising rates.

In considering these duration-hedged ETFs, there are two main factors to weigh: credit quality; and duration. That is, how much credit risk do you want to bear? And how far do you want to hedge duration? The table above helps fit ETFs into their appropriate buckets along those decision lines. Use the links in this list of the funds (ranked by AUM) to evaluate the funds further:

  • ProShares High Yield – Interest Rate Hedged ETF (HYHG | C-45)
  • ProShares Investment Grade – Interest Rate Hedged ETF (IGHG)
  • Market Vectors Treasury-Hedged High Yield Bond ETF (THHY | F-47)
  • iShares Interest Rate Hedged High Yield Bond ETF (HYGH)
  • iShares Interest Rated Hedged Corporate Bond ETF (LQDH)
  • WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration (HYZD)
  • WisdomTree Barclays U.S. Aggregate Bond Zero Duration ETF (AGZD)
  • WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (AGND)
  • WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration (HYND)

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