Fixed income investors often embrace corporate bonds for enhanced income and higher yields, but even some investment-grade corporate bond exchange traded funds subject investors to interest rate risk. The X-trackers Investment Grade Bond – Interest Rate Hedged ETF (Cboe: IGIH) hedges rate risk while offering the benefits of a traditional high-grade corporate bond ETF.

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.

In a rising rate environment, the price of older bonds with lower rates will fall since these older debt securities appear less attractive and traders would demand a discount on the older lower-yielding debt. On the other hand, new bonds are issued at the newer and higher rates, so investors would be less inclined to hold older debt securities with less attractive yields. As a result, the less appealing older bonds will see prices fall in response to the diminished demand.

Underscoring its low duration profile, DWS’s underlying index had a modified duration to worst of -0.19 years at the end of the second quarter, according to issuer data.

Reasons To Consider IGIH

In the current rising rate environment, a number of financial advisors are suggesting investors to treat fixed income like the sun and limit prolonged exposure. In this case, as the Federal Reserve’s predilection for raising interest rates does not appear to be changing anytime soon, it’s best to take advantage of these short-term rate adjustments by limiting duration.

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 is up 0.59% over the past month. The ETF has a 30-day SEC yield of 3.10%.

For more information on corporate debt, visit our corporate bonds category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.