Bond ETFs Without Interest Rate Risk

August 21, 2014

A suite of ETFs helps investors maintain fixed-income exposure in a rising-rate environment.

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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):

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