Some exchange traded funds feature the income benefits of corporate bonds while reducing investors’ exposure to interest rate risk. That group includes the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (Cboe: IGIH).
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.
IGIH, which turned three years old earlier this year, “seeks to track the performance, before fees and expenses, of the Solactive Investment Grade Bond – Interest Rate Hedged Index, which aims to mitigate exposure of interest rate sensitivity across the yield curve in a rising rate environment,” according to DWS.
Inside IGIH Holdings
IGIH holds 321 investment-grade corporate bonds. At the end of the first quarter, the fund’s underlying index had a modified duration to worst of -0.21 years. Nearly 30% of the issuers represented in the fund are financial services firms while the healthcare and energy sectors combine for 20.61%.
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Investors, though, do not need to sacrifice yields to diminish rate risk. Alternatively, investors can look 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.
IGIH yields 3.13% and charges just 0.25% per year, or $25 on a $10,000 investment.
For more information on the fixed-income space, visit our bond ETFs category.