For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has a 4.17 year duration, so a 1% increase in interest rates would roughly translate to a 4.17% decline in the ETF’s price. Additionally, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) shows a 8.06 year duration, so 1% rise in interest rates could mean a 8.06% decline in LQD.
Alternatively, with yields ticking higher, bond investors can utilize rate-hedged bond ETFs to generate income and help better maintain their principle.
For instance, the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH) and Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH) track investment-grade and speculative-grade bonds, respectively, but hedge their positions by shorting Treasury bonds to create portfolios with near zero duration. Consequently, through the short Treasury positions, the Interest Rate Hedged ETFs try to mitigate the negative effects of a rising rate environment and allow an investor to generate attractive yields without worrying about price depreciation.
Nevertheless, potential investors should be aware that these types of zero-duration, hedged bond ETFs may underperform a non-hedged version if rates decline.
Financial advisors who are interested in learning more about ETF income strategies can register for the Wednesday, August 12 webcast here.