A Way for Bond ETF Investors to Eliminate Rate Risk

Most fixed-income investors have shifted toward short-term bond funds in anticipation of a rising interest rate environment. However, through a targeted rate-hedged bond exchange traded fund strategy, investors can remove rate risk altogether.

“To prepare for rising interest rates, many investors move to short-term bond funds. This may help reduce their interest rate risk, but it doesn’t eliminate it. Is there a way to virtually eliminate it? There is – with interest rate hedged bond funds,” according to a ProShares note.

For example, the ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG) and ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) are interest-rate hedged bond ETFs whose underlying indices target a zero duration. With a zero duration, these bond ETFs have no sensitivity to changes in interest rates, providing investors access to higher yields and outperforming other non-hedged bond funds with similar durations when rates rise.

“The Index maintains exposure to credit opportunities as a primary source of return, while the hedge is designed to alleviate the drag on return when interest rates rise. The Index has a history of performing well during periods of rising rates,” according to ProShares.