The Federal Reserve has tightened its monetary policy as it gradually hikes interest rates to head off a potentially overheating economy. While rising rates can weigh on fixed-income portfolios, bond investors may look to interest rate-hedged exchange traded fund strategies to generate the same level of yields they are accustomed to and limit rate risk.
“Fixed income has a much more direct correlation to what’s happening with respect to rates, and really 2018 has been a difficult environment for fixed-income investors,” Kieran Kirwan, Senior Investment Strategist for ProShares, said at the Charles Schwab IMPACT 2018 conference.
Fixed-income investors who are looking for strategies in a rising rate environment could look at specialized strategies designed for hedging against rising rates.
For example, the ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG) and ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG) are two rate hedged ETF strategies that try to eliminate the rising rate risks. The two rate-hedged bond ETFs achieve their diminished rate-risk status by shorting Treasury notes so that the underlying portfolio shows a near-zero duration – duration is a measure of sensitivity to changes in interest rates, so a zero duration translates to no sensitivity to changes.
Consequently, these rate-hedged bond ETFs do not have to sacrifice their attractive yields when limiting their sensitivity to rising rates, allowing investors to still generate income without having to move down the yield curve. 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.
“We offer our investment strategies that allow you to invest in either investment-grade or high-yield or credit to earn an attractive level of income in this environment but most importantly hedge out the harmful effects that rising interest rates can have on your portfolios,” Kirwan added.
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