High-yield bonds and the related exchange traded funds have been solid performers this year in the face of higher interest rates. That includes rate-hedged strategies, such as the iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: SHYG), which is up nearly 3% year-to-date.
SHYG “seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years,” according to iShares.
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.
Due to their greater risk profile, high-yield bonds have been more correlated with major U.S. equity indices, which have experienced wider oscillations in recent months.
Fixed-income ETF investors should look into the opportunities in the short-end of the yield curve to generate income while mitigating duration risk and consider ways to blend active and passive exposures to position portfolios in today’s bond market.
‘SHYG’ ETF Details
SHYG’s effective duration is just 2.25 years, which is well below the durations found on traditional junk bond ETFs. Over 64% of the ETF’s holdings have maturities of 2 to 3 years or 3 to 5 years. SHYG invests at least 90% of its total assets in the component securities of the index, primarily high yield corporate debt, and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.