Don't Abandon Rate Hedged Bond ETFs Quite Yet | ETF Trends

Interest rated hedged fixed income ETFs were the toast of the bond ETF space a few years. These days, many advisors and investors may be overlooking funds such as the options, such as the WisdomTree Interest Rt Hdg Hi Yld Bd ETF (NasdaqGM: HYZD) simply because interest rates are low.

However, some market observers argue that the time to consider rate hedged ETFs isn’t just when rates are rising, but rather when borrowing costs are low. Think of it is as advanced preparation.

“Since the tumultuous selling in March, the U.S. HY sector has reversed course with spreads narrowing by roughly 500 bps as of this writing. In other words, spreads have retraced 65% of their widening from the peak that was registered on March 23,” said WisdomTree in a recent note. “While this is certainly good news, I feel U.S. HY corporates still have room for further improvement. Additional spread narrowing is expected, but it may not be as straightforward as the decline up to now has been. Indeed, prior to the March sell-off, HY spreads were trading in the +300 bps to +400 bps range. For the record, as of this writing, the differential was +611 bps. As you can see, there is ample room for improvement. Check the spread box in favor.”

HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in U.S. Treasury securities. The majority of the fund’s total assets will be invested in the component securities of the index and investments that have economic characteristics that are similar in nature.

Why HYZD Matters Now

From today’s low levels, the velocity at which yields rise should be of concern other than just the fact alone that yields are rising.

“The Fed has plenty of firepower at its disposal if needed. In fact, you can make the case the amounts have been relatively small up to now because the policymakers feel conditions don’t warrant a more aggressive approach. Check the Fed policy box in favor,” notes WisdomTree.

And if waiting for rising rates is the strategy an investor opts for, HYZD rewards that patience with a yield of 6.11%.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.