Ahead of the Federal Reserve interest rate hike, fixed-income investors are beginning to think about ways to position their portfolios. One way to help protect a portfolio from rate risks is through interest-rate-hedged exchange traded funds.
On the recent webcast, Managing Risk with Interest-Rate-Hedged ETFs, Bill Chepolis, Managing Director and Co-Head of Fixed Income for North America for Deutsche Asset & Wealth Management, explains how bond funds with longer durations could cause a drag on performance as interest rates rise.
For instance, Chepolis points out that a Treasury bond fund with a 20-year duration could experience a 20% drag on performance if interest rates were to rise 1%.
Peyton Studebaker, Managing Director and Portfolio Management at Caprin Asset Management, argues that the use of ETFs as part of fixed-income portfolio is helpful in navigating the bond markets and in responding to a rising interest rate environment.
Studebaker pointed out that Caprin has included leveraged inverse Treasury bond ETFs to help manage rate risk. The strategist explains that short Treasury position helped support a portfolio through rate move while protecting income generation.
Yield remains an important part of total return, and there are alternative investment strategies other than moving down the yield curve to hedge rate risk. Through a small short Treasury position, an fixed-income investor can hedge against the negative effects of rising rates and still generate the income he or she is accustomed to.