With increased expectations of a rising interest rate environment ahead, fixed-income ETF investors should prepare their bond portfolios for the growing risks.
On an upcoming webcast this Thursday, The Growing Risk of Normalizing Interest Rates, Simeon Hyman, Head of Investment Strategy at ProShares, will touch upon the risks of rising interest rate risks and how investors can position their portfolios to diminish the potential fallout.
For example, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) may allow investors to maintain income generation while mitigating the negative effects of rising interest rates.
These interest-rate hedged bond ETFs hold short positions in interest rate swaps, which more or less provide the rate-hedged ETFs a 0 effective duration – duration is a measure of a bond fund’s sensitivity to changes in interest rates so a zero duration reflects no sensitivity to changes. Consequently, the strategy should help an interest-rate-hedged ETF outperform its non-hedged fund options if rates continue to rise.
Alternatively, investors can hedge against rate risks through shorting Treasury bond securities through inverse or bearish ETF options like the ProShares Short 20+ Year Treasury (NYSEArca: TBF), which takes the simple inverse or -100% daily performance of Treasury bonds that mature in over 20 years.
For more aggressive bond traders, the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index, and he ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the -3x or -300% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
Potential traders, though, should be aware of the risks associated with these geared products and keep in mind that leveraged and inverse ETFs are designed to produce their target strategies on a daily basis. Consequently, when investors look at the long-term performance of a leveraged or inverse ETF, people may notice that the funds do not perfectly reflect their intended strategies.
Need CE Credit? Financial advisors interested in learning more about positioning a fixed-income portfolio in a rising rate environment can register for the Thursday, December 1 webcast here.