On the surface, it appears as though interest rate hedged ETFs need rates to rise to be successful. The ProShares Investment Grade—Intr Rt Hdgd (CBOE: IGHG) proves otherwise.
IGHG tracks the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index with long positions in investment-grade corporate bonds issued by both U.S. and foreign domiciled companies. This is particularly important during market downturns when the propensity for a company to default on its debt is higher. As such, IGHG focuses on investment-grade issues to reduce credit risk.
Bond funds hold a collection of debt with varying maturities, buying and selling debt securities to maintain their short-, intermediate- or long-term strategy. When it comes to bond ETFs, investors should look at the duration, or a bond fund’s measure of sensitivity to gauge their investment’s exposure to changes in interest rates – a higher duration means higher sensitivity to shifts in rates.
IGHG, which yields a tidy 3.50%, is up about 7% over the past year, indicating it has been a durable performer even as the Federal Reserve lowered borrowing costs three times in 2019.
“In a scenario where longer-term yields continue to rise and credit spreads continue to tighten, interest rate hedged corporate bonds could serve as alpha generators in a diversified fixed income portfolio,” said ProShares investment strategy analyst Daniel Busch in a recent note.
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.
Importantly, IGHG has recently shown it can outperform broader fixed income benchmarks even as yields decline.
“For a proof point, during the fourth quarter, the FTSE Corporate Investment-Grade (Treasury Rate-Hedged) Index was up 4.67%, outperforming the Bloomberg Barclays US Aggregate Bond, Bloomberg Barclays US Treasury Index, and Bloomberg Barclays US Corporate Investment Grade Index,” said Busch.
IGHG has a high-yield counterpart, the ProShares High Yield Interest Rate Hedged ETF (CBOE: HYHG). HYHG “targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures,” according to ProShares.
For more trends, visit the Core ETF Channel.
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.