High-yield corporate bonds and the related ETFs have been among the more solid performers in the fixed income space this year, but some investors may want to consider reducing interest rate risk with this asset class
The WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEARCA: HYZD) is one of the ETFs that can help with that objective.
The fund “utilizes an Institutional style approach that combines long positions in bonds representative of the BofA Merrill Lynch 0-5 year US High Yield Bond Index with a short position in Treasury securities to target zero duration,” according to WisdomTree.
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.
“The WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD) can help investors preserve the coverage and breadth of their current investments while reducing their overall exposure to interest rate risk,” according to WisdomTree. “By bundling this institutional style of approach to portfolio management in an exchange-traded fund (ETF), we believe that these products may provide investors with yet another tool to help reduce the interest rate risk of their overall portfolio while supplementing high income levels.”
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Steady As Rates Rise
With rates rising again, fixed-income investors may want to reconsider interest-rate hedged bond exchange traded fund strategies to diminish the negative effects of rate risk while still maintaining robust yield-generating opportunities.
Even as the Federal Reserve has boosted borrowing costs twice this year, HYZD has been mostly steady in 2018, posting a modest year-to-date gain.
“HYZD could offer several positive attributes to the portfolio in the context of a rising rate environment. In addition to the high income component, the offsetting interest rate exposure of the short positions in nominal Treasury Bonds could offer a significant reduction in the interest rate risk of the overall portfolio,” said WisdomTree.
HYZD has an effective duration of -0.14 years and a 30-day SEC yield of 5.27%, indicating that while the fund reduced rate risk, it does not rob investors of income.
For more information on the fixed-income space, visit our bond ETFs category.