“Fast rising rates brings corporate debt sustainability into play,” said Blokland. “So if rates keep rising like this I expect volatility in equity markets, but as long as they don’t ramp up to let’s say 4% or so, I think this should be seen as positive. Also the yield curve is steepening, reducing recession odds.”
Other High-Yielding ETF Options
Fixed-income investors can also explore other high-yield options, such as the ProShares High Yield—Interest Rate Hdgd (BATS: HYHG) and WisdomTree Interest Rt Hdg Hi Yld Bd ETF (NasdaqGM: HYZD).
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in U.S. Treasury securities. The majority of the fund’s total assets will be invested in the component securities of the index and investments that have economic characteristics that are similar in nature.
For more trends in fixed income, visit the Fixed Income Channel.