With Treasury yields rising in anticipation of the Federal Reserve potentially boosting interest rates later this year, issuers of exchange traded funds continue to meet advisor and investor for alternative fixed income exposure with interest rate hedged ETFs.
BlackRock’s (NYSE: BLK) iShares, the world’s largest ETF issuer, doubled the size of its interest rate hedged ETF lineup today with the debuts of iShares Interest Rate Hedged Emerging Markets Bond ETF (NYSEArca: EMBH) and the iShares Interest Rate Hedged 10+ Year Credit Bond ETF (NYSEArca: CLYH). Both are actively managed funds.
Unlike traditional bond ETFs, the rate-hedged bond ETFs try to mitigate the negative effects of a rising rate environment through shorting Treasury futures to match the overall duration of their diversified bond holdings. Looking further out, these types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment, especially as the Federal Reserve plans on hiking rates sometime later this year. [Hedged Bond ETFs to Diminish Rate Risk]
The iShares Interest Rate Hedged 10+ Year Credit Bond ETF “seeks to provide exposure to long-term U.S. investment grade bonds while mitigating interest rate risk by holding CLY (iShares 10+ Year Credit Bond ETF) and short positions in interest rate swaps,” according to iShares.
Nearly two-thirds of CLYH’s bond holdings have maturities of 20 years or more with another 16% having maturities of 15 to 20 years. Forty-six of the new ETF’s holdings are rated BBB with another 33% rated A and 10.4% carrying AA ratings.
The iShares Interest Rate Hedged Emerging Markets Bond ETF holds the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB), the largest emerging markets bond ETFs, short positions in interest rate swaps.
EMB is a popular yield play with a 30-day SEC yield of 5.04%, according to iShares data, but an effective duration of 7.24 years makes the ETF vulnerable to hawkish changes in Fed policy. EMBH helps alleviate that concern with an effective duration of just 0.22 years.
“iShares interest rate hedged ETFs are the industry’s first actively managed interest rate hedged products that can potentially benefit from the established liquidity of existing bond funds. By holding shares of EMB and CLY in combination with interest rate swaps, EMBH and CLYH provide easy access to cost effective potential solutions for investors who are attempting to mitigate interest rate risk,” according to iShares.
iShares introduced its first rate hedged ETFs in May 2014, the iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH) and the iShares Interest Rate Hedged High Yield Bond ETF (NYSEArca: HYGH).
Tom Lydon’s clients own shares of EMB.