With the Federal Reserve signaling it will embark on interest rate normalization with more hikes to come, fixed-income investors can still maintain their attractive payouts without shifting down the yield curve through rate-hedged bond exchange traded funds.

Bond investors would usually move down the yield curve to hedge against rising interest rate risks as a lower duration bond fund would have a lower sensitivity to changes in interest rates. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.

Investors, though, do not need to sacrifice yields to diminish rate risk. Alternatively, investors can look to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.

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