Negative duration ETFs, on the other hand, try to profit off a rising rate environment by heavily using short contracts to capitalize on falling bond prices if rates do rise. However, due to the more aggressive nature of this strategy, these types of ETFs will underperform if rates fall.
AGND shows a negative 5.02 year duration while HYND has a negative 7.44 year duration. Consequently, a 1% rise in interest rates could generate a 5.02% gain in AGND and a 7.44% increase in HYND. However, a falling rate would negatively affect the ETFs.
Morever, the diverging central bank policies, notably between the Fed’s tightening stance and the European Central Bank and Bank of Japan’s loosening policies, could signal a stronger dollar currency. [Hedged-Europe ETFs to Capture ECB $1.2T Stimulus Growth]
Currency traders can take a look at the actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) to capture any further strength in the USD. USDU, though, tracks the USD against a broader basket of developed and emerging market currencies – the euro, yen, Canadian dollar, Mexican peso, pound sterling, Australian dollar, Swiss franc, South Korean won, Chinese yuan and Brazilian real. [Overseas Deflation, Currency Wars to Support USD ETF]
Financial advisors who are interested in learning more about bond strategies for the changing fixed-income environment can register for the Wednesday, November 11 webcast here.