Fight Back Rising Rates with This Hedged High-Yield ETF

Investors have various options to protect their bond portfolios from inflation, but with the ProShares High Yield—Interest Rate Hedged (HYHG), they get hedging baked right into the exchange traded fund (ETF).

With a focus on high yield, HYHG also gives investors an opportunity to edge out low yields on safe haven Treasury notes or other investment-grade debt. The hedging component consists of short positions in said Treasury notes.

HYHG seeks investment results, before fees and expenses, that track the performance of the FTSE High Yield (Treasury Rate-Hedged) Index. Under normal circumstances, the fund will invest at least 80% of its total assets in high-yield bonds included in the index.

The index is comprised of (a) long positions in U.S. dollar-denominated high-yield corporate bonds and (b) short positions in U.S. Treasury notes or bonds of, in aggregate, approximate equivalent duration to the high-yield bonds.

Overall, HYHG offers debt exposure to:

  • A diversified portfolio of dollar-denominated high-yield corporate bonds from both U.S. and foreign issuers.
  • Bonds of at least a $1 billion and with at least one year until maturity.
  • Bonds rated BB+/Ba1 and a minimum of C/C by either Moody’s or S&P.

HYHG Chart

Less Sensitive than Short-Duration Options

Another way to limit the effects of rising rates is to opt for short-term bonds that minimize duration risk. However, HYHG offers investors an option that is even less sensitive to potential rate changes.

As mentioned, HYHG is able to accomplish this by targeting a duration of zero. HYHG seeks to have almost no sensitivity to rising rates, and compared to short-term bond funds that still have a degree of interest rate risk, HYHG should be less sensitive to rate changes.

Even while the Federal Reserve is opting to keep interest rates steady for the time being, an interest rate policy adjustment could be forthcoming if an improving economy shows signs of overheating.

At the same time, the fund offers higher returns that are generated by exposure to the credit risk of a diversified portfolio of high yield corporate bonds.

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