As bond yields push higher and the markets wait on a Federal Reserve that is determined to hike interest rates ahead, fixed-income investors may look to bond exchange traded fund strategies that specifically incorporate an interest-rate hedged component to diminish the negative effects of rate risk and still maintain robust yield-generating opportunities.
Yields on government bonds have increased this year as U.S. Treasuries attracted large safe-haven bets in the recent equity market sell-off. Benchmark 10-year U.S. Treasury bond yields are now hovering around 3.0% for the first time since 2013.
In a rising rate environment, bond investors would usually move down the yield curve to limit the negative effects of rising rates 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 as well.
Related: ETF Trends Fixed Income Channel
Investors, though, do not need to sacrifice yields to diminish rate risk. Instead, investors can turn to rate-hedged or zero-duration bond ETFs. The group of interest rate-hedged or zero duration ETFs hold long-term bonds but also simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
Due to their near-zero durations, the rate-hedged bond funds should show little to no sensitivity to changes in interest rates. These types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment ahead.
Investors who are interested in the rate-hedged bond strategy have a number of other ETF options available, including:
- Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (NYSEARCA: IGIH)
- Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEARCA: HYIH)
- iShares Interest Rate Hedged Corporate Bond ETF (NYSEARCA: LQDH)
- iShares Interest Rate Hedged 10+ Year Credit Bond ETF (NYSEARCA: CLYH)
- iShares Interest Rate Hedged High Yield Bond ETF (NYSEARCA: HYGH)
- VanEck Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA: THHY)
- ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG)
- ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG)
- WisdomTree Barclays U.S. Aggregate Bond Zero Duration Fund (NYSEARCA: AGZD)
- WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEARCA: HYZD)
For more information on the fixed-income space, visit our bond ETFs category.