Compelling Reasons to Consider Rate-Hedged ETFs

With the Federal Reserve expected to continue raising interest rates, fixed income investors are looking for alternatives to traditional bond funds. In some cases, investors can hedge rate risk while maintaining solid income profiles.

The ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG) and the ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG) are examples of exchange traded funds that investors can deploy to mitigate interest rate risk while not sacrificing solid income streams.

IGHG, which debuted nearly five years ago, reduces rising rates risk 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. The ETF’s net effective duration is -0.28 years, according to ProShares data.

While many asset allocators favor moving to traditional short-term bond funds when rates rise, that strategy is not risk free. For example, while traditional short-term bond funds reduce interest rate risk, the risk is not completely eliminated. Second, standard short-term bond funds reduce the user’s ability to capture opportunities at the credit level.

Alternative Moves in ‘IGHG’ and ‘HYHG’

The investment-grade IGHG and the high-yield HYHG can help ease the burdens of the aforementioned scenarios.