Time for Bond ETF Investors to Consider Rate-Hedged Options

Bond exchange traded fund investors can maintain yield generation and diminish the negative effects of rising rates on their investments through targeted interest-rate hedged strategies.

“As rates pressures rise, it may be time for investors to consider a move into interest-rate hedged exposure,” Luke Oliver, Head of ETF Capital Markets at Deutsche Asset Management, said in an email.

For instance, Deutsche Asset Management offers 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 (BATS: HYIH) to access investment- and speculative-grade corporate bonds while negating the negative effects of rising interest rates.

The two funds take long positions in corporate debt securities but also pare the exposure with short positions in U.S. Treasury securities of approximate equivalent duration to the corporate bonds in an attempt to maintain a near zero bond duration. With a near zero duration, the bond ETFs will exhibit little to no negative effect when interest rates rise, outperforming non-interest-rate hedged bond funds.