For example, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) hold short positions in interest rate swaps to provide about a 0 year 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 zero-duration strategy should help an interest-rate-hedged ETF outperform its non-hedged fund options if rates continue to rise.
HYHG and IGHG “maintain full exposure to credit risk as a primary source of return while the built-in hedges alleviate the drag on returns caused by rising interest rates,” ProShares said.
For more information on the fixed-income market, visit our bond ETFs category.