With yields rising and many anticipating an imminent Federal Reserve interest rate hike, bond investors can consider an alternative, strategic interest-rate-hedging exchange traded fund strategy to diminish the negative effects of the Fed’s expected rate normalization.
The Sit Rising Rate ETF (NYSEArca: RISE) brings an institutional-level interest rate hedging strategy to everyday investors. With many fixed income investors concerned about the effects of higher interest rates, RISE could be an ideal ETF for a rising rate environment.
RISE “works by targeting a negative 10-year duration using futures and options on 2, 5 and 10-year maturity Treasury futures contracts. RISE can be used strategically as a hedge, allowing investors to keep their bond positions, but providing protection when rates rise,” reports ETF Daily News.
Some 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.