Hedged Bond ETFs Outperform As Treasury Yields Rise

HYZD was down 0.7% over the past week but gained 0.7% over the past month. HYHG rose 0.1% over the past week and 1.9% over the past month. THHY returned 0.3% over the past week and 1.2% over the past month. HYGH increased 0.3% over the past week and 0.6% over the past month. HYIH advanced 1.9% over the past week and 2.1% over the past month.

Additionally, while slightly underperforming their junk bond counterparts, the hedged investment-grade bond ETFs still outpaced the non-hedged investment-grade corporate bond options. For instance, the actively iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH) down 0.3% over the past week and up 0.2% over the past month. The recently launched Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH) fell 0.7% over the past week and 0.2% over the past month. Lastly, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) added 0.2% over the past week and 0.4% over the past month.

These new types of  zero duration or negative duration ETFs hold long-term bonds, but they will take short positions in Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise. The short positions would essentially diminish the funds’ duration – a measure of sensitivity of the price of a fixed-income asset to changes in interest rate risks, so a a low duration would translate to a smaller sensitivity to shifting rates. Moreover, as yields have been inching higher and Treasury bond prices fell over recent weeks, the short Treasury positions helped bolster returns in the rate-hedged bond ETFs.

However, potential investors should be aware that since these bonds hold short Treasury positions, these rate-hedged ETFs may underperform non-hedged bond ETFs if Treasury yields fall and Treasuries begin to rebound.

For more information on the fixed-income market, visit our bond ETFs category.