“We believe that many investors in high yield bond funds may be focused on credit risk but overlook the risk presented by rising rates. When rates go up, they could be in for an unpleasant surprise,” said Michael Sapir, Chairman and CEO of ProShare Advisors.
Steve Cohen, managing director at ProShares, in a telephone interview Thursday said the firm wanted to launch a high-yield product that wasn’t “plain-vanilla.” The company is best known for its alternative ETFs, including leveraged and inverse funds.
“There is definitely a hunt for income,” Cohen said. “There have been strong flows to high-yield bonds the past few years. What’s missing here is an ETF that can hedge out interest rate risk when rates go up.”
The short-duration junk bond ETFs such as HYS and SJNK do have some rate risk. For example, HYS has an effective duration of nearly 2 years, while SJNK has a modified adjusted duration of roughly 4 years.
Cohen said the new ProShares ETF attempts to match the durations of the high-yield bond holdings with short positions in Treasury futures across the curve. This seeks to substantially eliminate duration and interest-rate risk, he added.