The rate-hedged bond ETFs 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.

On the other hand, most fixed-income investors look to short duration bond funds since the lower duration translate to a diminished sensitivity to changes in interest rates. However, short-term bond funds will still be negatively affected by higher rates.

Alternatively, the zero-duration strategy should help an interest-rate-hedged ETF outperform its non-hedged fund options if rates continue to rise.

“Short-term bond funds are not the only answer to rising rates,” ProShares said in a note. “Another – perhaps better – way to remain invested in bonds is to remove the interest rate risk entirely with a build-in hedge. If rates continue to rise, now may be a good time to prepare with an interest rate hedged bond ETF.”

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