With rates rising again, fixed-income investors may want to reconsider interest-rate hedged bond exchange traded fund strategies to diminish the negative effects of rate risk while still maintaining robust yield-generating opportunities.
Global bonds are selling off, driving yields to their highest level in over a month, as investors digested messages from central banks this week on rolling back easy monetary policies, reports Rachel Koning Beals for MarketWatch.
For instance, yields on benchmark 10-year Treasury notes have risen back to 2.267% from a recent low of 2.137%.
As more anticipate the European Central Bank to begin tightening its monetary policy, traders are shifting away from a heavy U.S. Treasury position to diversify with higher yields in foreign markets.
“The time is approaching when the [Federal Reserve] will no longer be the only major central bank in tightening mode,” foreign-exchange strategists at BNP Paribas SA said in a note.
Bond investors would usually move down the yield curve to hedge against rising rates as a lower duration bond fund would have a lower sensitivity to changes in interest rates. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.
Investors, though, do not need to sacrifice yields to diminish rate risk. Alternatively, investors can look to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
Due to their near-zero durations, the rate-hedged bond funds should show little to no sensitivity to changes in interest rates. These types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment ahead.
Investors who are interested in the rate-hedged bond strategy have a number of other ETF options available, including:
- Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEARCA:IGIH)
- Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEARCA:HYIH)
- Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (NYSEARCA:EMIH)
- iShares Interest Rate Hedged Corporate Bond ETF (NYSEARCA:LQDH)
- iShares Interest Rate Hedged Emerging Markets Bond ETF (NYSEARCA:EMBH)
- iShares Interest Rate Hedged 10+ Year Credit Bond ETF (NYSEARCA:CLYH)
- iShares Interest Rate Hedged High Yield Bond ETF (NYSEARCA:HYGH)
- VanEck Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA:THHY)
- ProShares Investment Grade-Interest Rate Hedged ETF (BATS:IGHG)
- ProShares High Yield Interest Rate Hedged ETF (BATS:HYHG)
- WisdomTree Barclays U.S. Aggregate Bond Zero Duration Fund (NYSEARCA:AGZD)
- WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (NYSEARCA:AGND)
- WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEARCA:HYZD)
- WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund (NYSEARCA:HYND)
For more information on the fixed-income space, visit our bond ETFs category.