In anticipation of a rising rate environment, ProShares is expanding its interest rate hedged bond exchange traded fund suite to include an investment grade debt play.
ProShares will reportedly launch the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) on Thursday, Nov. 7.
According to the prospectus, IGHG will try to reflect the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, which is comprised of long positions in USD-denominated investment grade corporate bonds issued by U.S. and foreign companies while taking short positions in U.S. Treasury notes.
Essentially, the underlying index tries to achieve an overall duration of zero. Duration is measure of a bond’s sensitivity to changes in interest rates. A higher duration corresponds with a larger negative impact on bond prices if interest rates rise – bond prices have an inverse relationship to rates.
Consequently, the fund should outperform a long-only investment grade bond fund as rates rise. However, due to the short positions in Treasuries, the fund may underperform in periods of falling or static interest rates.
As of Nov 1, the underlying index held about 457 investment grade bonds from 151 issuers. About 75% of the bonds were issued by U.S. companies while 25% were issued by foreign companies.
Investment grade bonds have a minimum rating of Baa3 or BBB-.
IGHG has a 0.30% expense ratio.
ProShares also launched the ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) in July. This ETF provides a similar strategy to IGHG, except HYHG tracks high-yield, speculative grade, junk bonds. [A High-Yield Bond ETF for Rising Rates]
For more information on new fund products, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.