The Federal Reserve boosted interest rates three times in 2017 and it is widely expected the central bank will continue its pace of gradual rate hikes in 2018. That does not mean investors need to eschew bonds altogether.
Investors, though, do not need to sacrifice yields to diminish rate risk. Alternatively, investors can look to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
The ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG) is one ETF investors can consider for added income while guarding against the potentially erosive effects of higher interest rates.
Bond investors would usually move down the yield curve to hedge against rising rates as a lower duration bond fund would have a lower sensitivity to changes in interest rates. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.
IGHG, which is over four years old, “provides the return potential of a diversified portfolio of investment grade corporate bonds, targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures and offers even less interest rate sensitivity than short-term bonds by targeting a duration of zero,” according to ProShares.