How Does HYND Work?
As shown above, HYND comprises a long portfolio of high-yield bonds and a short position of U.S. Treasury futures that target a negative 7-year duration. By taking a 20% allocation in HYND and the remainder in a traditional bond portfolio with a duration of 5.5 years, investors are able to reduce their net bond duration to 3 years.
Although investors will generally be better off if interest rates don’t move or decline relative to an unhedged position, we believe that HYND provides a reasonable balance between current income and negative interest rate exposure. Should nominal interest rates rise in 2014 and credit spreads decline, HYND could provide investors with stronger returns compared to unhedged bond portfolios.
Important Risks Related to this Article
HYND is new and has a limited operating history. You cannot invest directly in an index. There are risks associated with investing, including possible loss of principal. High-yield or “junk” bonds have lower credit ratings and involve a greater risk to principal. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. The Fund seeks to mitigate interest rate risk by taking short positions in U.S. Treasuries, but there is no guarantee this will be achieved. Derivative investments can be volatile, and these investments may be less liquid than other securities, and more sensitive to the effects of varied economic conditions.
Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.
The Fund may engage in “short sale” transactions where losses may be exaggerated, potentially losing more money than the actual cost of the investment and the third party to the short sale may fail to honor its contract terms, causing a loss to the Fund. While the Fund attempts to limit credit and counterparty exposure, the value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.