An ETF of ETFs to Trim Rate Risk

Sticking with high-yield corporate bonds as interest rates climb can be difficult for investors, but some make exchange traded funds make that task easier. That group includes the Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF (Cboe: HYIH).

Bond investors would usually move down the yield curve to hedge against rising interest rate risks 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.

“HYIH seeks to track the performance, before fees and expenses, of the Solactive High Yield Corporate Bond – Interest Rate Hedged Index, which aims to mitigate exposure of interest rate sensitivity across the yield curve in a rising rate environment,” according to DWS.

How HYIH Works

HYIH uses a methodology seen in other rate-hedged ETFs, which is to hold a traditional junk bond ETF coupled with short positions in Treasury swaps. In the case of HYIH, the fund holds two other corporate bond ETFs, the Xtrackers USD High Yield Corporate Bond ETF (HYLB) and the Xtrackers High Beta High Yield Bond ETF (NYSEArca: HYUP).

HYUP, which debuted in January, tries to reflect the performance of the Solactive USD High Yield Corporates Total Market High Beta Index, which includes the high-yield corporate bond market that exhibits higher overall beta to the broader high yield corporate bond market.

Beta is a measure of a security’s sensitivity or volatility and reflects the rate of change in a security’s price that results from overall market moves. Higher yielding securities also tend to exhibit higher beta.