For example, the popular investment-grade corporate bond ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD), has a 8.32 year effective duration and a 3.19% 30-day SEC yield, so a 1% increase in interest rates could translate to a 8.32% decline in the ETF’s price. Consequently, many have shifted down the yield curve to lower duration bond ETFs as a means to hedge against rising interest rates – a lower duration means that the fund would be less sensitive and exhibit a lower decline in the event of rising interest rates.
Related: Control Rate Risk Exposure with Low-Duration Bond ETFs
Alternatively, something like the iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH) holds short positions in interest rate swaps, which provides the rate-hedged ETF with a 0.03 effective duration – a 1% rise in interest rates would translate to a 0.03% decline in the funds price, and LQDH would still offer up a 3.43% 30-day SEC yield.
Investors who are interested in the rate-hedged bond strategy have a number of ETF options available.
Interest Rate-Hedged ETFs:
- Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEArca: IGIH)
- Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH)
- Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (NYSEArca: EMIH)
- iShares Interest Rate Hedged Corporate Bond ETF (NYSEArca: LQDH)
- iShares Interest Rate Hedged Emerging Markets Bond ETF (NYSEArca: EMBH)
- iShares Interest Rate Hedged 10+ Year Credit Bond ETF (NYSEArca: CLYH)
- iShares Interest Rate Hedged High Yield Bond ETF (NYSEArca: HYGH)
- Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY)
- ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG)
- ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG)
- WisdomTree Barclays U.S. Aggregate Bond Zero Duration Fund (NYSEArca: AGZD)
- WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (NYSEArca: AGND)
- WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEArca: HYZD)
- WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund (NYSEArca: HYND)