Fixed Income ETF Investing Ideas for Rising Rates

With government bonds provident higher returns, some are looking back to Treasuries and other high-grade debt again as a hedge against further market turbulence.

RISE’s underlying portfolio is rebalanced monthly to maintain a negative 10-year average effective duration through short positions in Treasury instruments.

Negative duration bond ETFs try to profit off a rising rate environment by heavily using short contracts to capitalize on falling bond prices if rates do rise. However, due to the more aggressive nature of this strategy, these types of ETFs will underperform if rates fall.

With a negative 10-year duration, investors may find that a 1% increase in U.S. Treasury yields results in about a 10% return in RISE’s price. So the price moves nearly 10 times the change in yield. Duration is a measure of a bond funds sensitivity to changes in interest rates, so a large effective duration reflects a greater sensitivity in the bond fund’s price to changes in rates.

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