Yields on benchmark Treasuries have increased this year as market observers anticipate further monetary policy tightening out of the Federal Reserve.
Nevertheless, fixed-income investors have a number of ways to hedge their portfolios against rising rates through targeted exchange traded fund strategies.
The ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG) is one way investors can stay involved with high-yield corporate debt while reducing interest rate risk. HYHG tracks the FTSE High Yield (Treasury Rate-Hedged) Index.
HYHG, which is over five years old, “targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures,” according to ProShares.
By hedging away rate risk, bond investors can focus on the underlying debt securities without fear of the negative effects of rising interest rates, maintaining their current level of income generation and potentially capitalizing on the tightening credit spreads.
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Examining HYHG
HYHG has a net effective duration of -0.28 years, but that significantly reduced rate risk does not reduce the fund’s income profile as highlighted by a 30-day SEC yield of 6.27%. At the end of the first quarter, HYHG held 156 bonds from 115 issuers. No more than two bonds from each issuer are allowed in the fund.
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.
The bulk of HYHG’s holdings are rated between BB+ and B-, but the ETF does have some exposure to speculative CCC-rated debt. Year-to-date, the ETF has seen $32.51 million in inflows.
HYHG is off about 0.30% percent this year while the largest junk bond ETF, which does not hedge rate risk, is lower by nearly 2%.
For more information on corporate debt, visit our corporate bonds category.