This alternative approach tries to eliminate interest rate risk while maintaining full exposure to credit opportunities.
“It’s important because, when rates rise, credit spreads have typically tightened and boosted returns,” according to ProShares.
The two rate-hedged bond ETFs achieve their diminished rate-risk status by shorting Treasury notes so that the underlying portfolio shows a near-zero duration – duration is a measure of sensitivity to changes in interest rates, so a zero duration translates to no sensitivity to changes. For example, IGHG shows a -0.02 year duration and a 3.50% 30-day SEC yield, and HYHG has a -0.07 year duration and a 5.21% 30-day SEC yield.
By hedging away rate risk, bond investors can focus on the underlying debt securities without fear of the negative effects of rising interest rates, maintaining their current level of income generation and potentially capitalizing on the tightening credit spreads.
For more information on the fixed-income space, visit our bond ETFs category.