A Bond ETF Strategy Catered for a Rising Rate Environment

Due to their near-zero durations, the rate-hedged bond funds should show little to no sensitivity to changes in interest rates. These types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment ahead.

For instance, 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 -0.01 effective duration, whereas the popular iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) has a 7.91 year duration. Additionally, the rate-hedging strategy does not sacrifice too much in yields as LQDH shows a 3.06% 30-day SEC yield, compared to LQD’s 3.54% 30-day SEC yield. The strategy should help an interest-rate-hedged ETF outperform its non-hedged options if rates continue to rise.

Investors who are interested in the rate-hedged bond strategy have a number of other 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)

For more information on the fixed-income markets, visit our bond ETFs category.