Rising interest rates can be viewed as a threat to high-yield corporate bonds, but some exchange traded funds can keep investors involved junk bonds while protecting against hawkish moves by the Federal Reserve. One of the options in that group is the ProShares High Yield Interest Rate Hedged ETF (Cboe: HYHG).
HYHG has an investment-grade counterpart, the ProShares Investment Grade-Interest Rate Hedged ETF (Cboe: IGHG). 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.
HYHG, which debuted in May 2013, tracks the Citi High Yield (Treasury Rate-Hedged) Index. The ETF “targets zero interest rate risk by including a built-in hedge against rising rates that uses short positions in U.S. Treasury futures and offers even less interest rate sensitivity than short-term bonds by targeting a duration of zero,” 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.
HYHG had nearly $149 million in assets under management at the end of the third quarter. Bonds must have a minimum issue size of $1 billion to be included in the fund. No more than 2% of the underlying index is allocated to a single issuer.
At the end of the third quarter, HYHG held 172 junk bonds from 122 issuers. The ETF’s weighted average maturity was 6.3 years. HYHG’s net effective duration is actually slightly negative at -0.04 years, but even with the rising rates protection, investors are not cheated out of yield as highlighted by the fund’s 30-day SEC yield of 5.93%.
The bulk of HYHG’s holdings are rated between BB+ and B-, but the ETF does have some exposure to speculative CCC-rated debt.
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.