As rates rise, bond funds will suffer. However, exchange traded fund investors can gain exposure to high-yield fixed-income assets with a built-in interest rate hedge.
The ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) tries to reflect the performance of the Citi High Yield (Treasury Rate-Hedged) Index, which tracks a basket of high-yield bonds with a built-in hedge against rising interest rates. HYHG has a 0.50% expense ratio and a 5.69% 30-day SEC yield. [High-Yield ETFs with Some Built-In Rate Hedges]
The fund tracks bond securities issued from the U.S. or Canada with at least one year remaining to maturity. Additionally, no more than two securities can come from the same issuer and the index has a 2% cap to any single issuer. [Junk Bond ETFs Attract Yield Hunters After Sell-Off]
As of July 1, the ETF has an effective duration of 0.00 years. Duration is a measure of the fund’s sensitivity to changes in interest rates. A low duration typically corresponds with a lower interest rate risk. Interest rates have an inverse relationship to bond prices – rising rates translates to falling bond prices.
HYHG achieves a near negligible duration by taking short positions in Treasury securities. According to ProShares, “the hedge is designed to have sensitivity to interest rates equivalent to the long high yield bond portfolio.”