The June jobs report released last Friday revealed better-than-forecasted job growth with 213,000 jobs created, 9.23 percent better than the forecasted 195,000, which signals more economic growth that could spark more interest rate hikes–an environment that is rife for a fixed-income ETF like iShares Interest Rate Hdg Hi Yld Bd ETF (NYSEArca: HYGH) to thrive.
Per MarketWatch, the “June employment report gives the Federal Reserve a green light to continue to raise interest rates at what’s been shown to be its preferred once-every-three-months pace, economists said Friday.”
Interest Rate Risk Hedging
The prime focus of HYGH is to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. In order for HYGH to achieve its investment objective, it invests 80 percent of its net assets in U.S. dollar-denominated high yield bonds and also incorporates short positions in U.S. Treasury Securities.
45.84 percent of HYGH’s holdings include yields tied to a fixed-income portfolio of bonds with a BB credit rating and another 40 percent with a B credit rating–more credit risk in lieu of higher yields as opposed to bonds with credit ratings higher than BB. As an example, high yield bonds with a BB credit rating have generated returns of 23.5 percent according to the ICE BofAML US High Yield BB Effective Yield index below.