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.