The prospect of rising interest rates in 2013 drove the introduction of interest rate-hedged high-yield bond exchange-traded funds (ETFs). These products are designed specifically to help limit interest rate sensitivity (or duration1) by shorting U.S. Treasuries.
2013 was also the biggest year for bank loan issuance since 2007, and bank loan ETF inflows were massive. Both hedged high-yield bonds and bank loans help reduce interest rate sensitivity, isolating credit risk of below investment-grade issuers. Although hedged high-yield investors use some yield to pay for the interest-rate hedge, they still are exposed to high-yield bonds, which outperformed bank loans in 20132:
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Source: FactSet. Data as of February 21, 2014 since MVTHHY Index’s February 5, 2013 inception. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting marketvectorsetfs.com. Historical performance is not indicative of future results; current data may differ from data quoted. Indexes are unmanaged and are not securities in which an investment can be made.
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