A suite of ETFs helps investors maintain fixed-income exposure in a rising-rate environment.
Chart courtesy of StockCharts.com
When it comes to bonds, investors bear two types of risk: credit risk and interest-rate risk. Investors profit from holding credit risk when default rates are stable or falling and credit conditions are improving. Similarly, it's profitable to bear interest-rate risk when interest rates are declining. But what about when we're facing the prospect of a rising-rate environment?
That's where duration-hedged ETFs come into play. 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, investors have two questions to answer.
First, how much credit risk do you want to bear? These ETFs come in high-yield and investment-grade varieties.
Second, how far do you want to hedge duration? There are ETFs that hedge duration to zero (neutralizing interest-rate risk) as well as ETFs with negative duration (inverting interest-rate risk).
Use the links below to further investigate each of the duration-hedged ETFs available (ranked by AUM):
- ProShares High Yield – Interest Rate Hedged ETF (HYHG | B-53)
- ProShares Investment Grade – Interest Rate Hedged ETF (IGHG | C)
- iShares Interest Rate Hedged High Yield Bond ETF (HYGH)
- Market Vectors Treasury-Hedged High Yield Bond ETF (THHY | D-44)
- iShares Interest Rated Hedged Corporate Bond ETF (LQDH)
- WisdomTree Barclays U.S. Aggregate Bond Zero Duration ETF (AGZD | C-42)
- WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration (HYZD | D)
- WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (AGND | D-37)
- WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration (HYND | D)