In March, Deutsche AWM introduced the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH), the Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH) and the Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (NYSEArca: EMIH). HYIH’s underlying holdings show a yield to worst of 4.9%. IGIH has a yield to worst of 1.39% and EMIH has a yield to worst of 3.68%. [Deutsche Adds Three New Bond ETFs]

IGIH tracks investment-grade corporate bonds, HYIH includes a group of speculative-grade junk bonds and EMIH follows U.S.-dollar-denominated emerging market bonds. However, unlike traditional bond ETFs, these options try to mitigate interest rate sensitivity across the yield curve in a rising rate environment by taking short positions in U.S. Treasury futures.

Lance Allen, ETF Regional Vice President for Deutsche Asset & Wealth Management, points out that the ETFs are first created through a long portfolio of their respective fixed-income asset categories and then include five U.S. Treasuries corresponding to two-year, five-year, 10-year, long and ultra-long U.S. Treasury futures, depending on the long bond position’s duration.

Through their short positions, IGIH, HYIH, and EMIH have a modified duration of about zero years. Duration is a measure of a bond fund’s sensitivity to changes in interest rates. Consequently, since these bond ETFs essentially have a zero duration, a rising interest rate would not negatively affect the investments. However, potential investors should keep in mind that if interest rates were to fall, these hedged bond ETFs could underperform non-hedged options.

“Interest-rate-hedged ETFs can work in tandem with existing fixed-income holdings and as risk-management tools to target a specified duration and interest-rate exposure,” Allen said.

Financial advisors who are interested in learning more about hedged fixed-income strategies can listen to the webcast here on demand.