In the case of the negative duration strategies, these portfolios “overhedge” their long exposure through selling longer duration securities to target the desired exposure without leverage. As shown in the table below, the primary difference between zero and negative duration strategies is the concentration of short positions at the longer end of the yield curve.
Duration Statistics and Breakouts for “Rising Rate” Indexes
For definitions of indexes in the chart, please visit our glossary.
While the timing of changes in Fed policy remains uncertain, we believe that ETFs provide an important tool for helping to manage interest rate risk. Through our approach, we allow investors to maintain their existing bond exposure while mitigating their overall exposure to interest rate risk.
1Source: Barclays, as of 12/31/13.
2Source: Barclays, as of 8/31/14.
Important Risks Related to this Article
There are risks associated with investing, including possible loss of principal. Non-investment-grade debt securities (also known as 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 duration Funds seek 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.