Bryan argues that the hedging strategy can offset the negative impact of rising rates. Bonds and interest rates have an inverse relationship, so rising rates typically correspond with falling bond prices.
“I think it’s a reasonable strategy, at least for the two U.S. funds,” Bryan added.
The interest rate risk in the U.S., though, may not be the same in the emerging markets. Consequently, the hedged position could weaken the active emerging market bond ETF relative to an unhedged version.
ProShares recently launched a similar strategies. For instance, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and the ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) are comprised of long positions in USD-denominated corporate bonds issued by U.S. and foreign companies and take short positions in U.S. Treasury notes. [Alternative ETFs Mitigate Rising Rates Risk]
For more information on new fund products, visit our new ETFs category.