Inside Rising Rate ETFs

One of the most prominent themes in the exchange traded funds industry over the past year has been investors’ increased interest in low duration bond funds as a means of protecting portfolios against what many believe is an inevitable rise in interest rates.

ETF issuers have met that demand with aplomb. Lead in large part by BlackRock’s (NYSE: BLK) iShares, the world’s largest ETF sponsor, and WisdomTree (NasdaqGS: WETF), issuers have brought more low, zero and even negative duration ETFs to market in recent months. [Spotlight on a Floating Rate ETF]

Issuers “have launched or filed plans for at least 17 such ETFs in the six months through March. That is as many as in the prior three years combined, and the new ETFs now hold about $430 million,” reports Joe Light for the Wall Street Journal.

In Late January, the U.S. Treasury auctioned $15 billion in two-year floating rate notes in what was the first time since 1997 the Treasury unveiled a new a security to investors. A week later, the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR) and the iShares Treasury Floating Rate ETF (NYSEArca: TFLO) debuted. [Two Floating Rate ETFs Launch]

Those ETFs fit the bill as low duration products. USFR’s effective duration is just 0.02 years while TFLO’s option adjusted duration is just 0.01 years, according to iShares data.

Zero duration products offer another avenue for rising rates protection. These ETFs “typically buy longer-term bonds but then ‘short’ Treasurys or use Treasury futures contracts to counterbalance losses that would have otherwise occurred if rates rose,” according to the Journal.

Examples of zero and negative duration ETFs include the Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY). THHY is just over a year old and tracks an index that is “designed to provide exposure to below investment grade corporate bonds, denominated in U.S. dollars; that are, through the use of Treasury notes, hedged against rising interest rates,” according to Market Vectors. THHY has modified duration of -0.32 years.