4 Hedged & Inverse ETFs to Ride Out Imminent Rate Hike - ETF News And Commentary
The market has long been pointing to September as the month of the first rate hike in nine years. The Fed has mentioned no definite timeline for the lift-off. Yet a rebounding housing sector, ‘moderate’ U.S. economic growth, a decent GDP report and steady job gains give every reason to bet on a lift-off next month.
Same was the opinion of Fed Bank of Atlanta President Dennis Lockhart, who in fact has a voting right in the Fed policy meeting. He said that only a ‘significant deterioration’ in U.S. economic readings can pull him back from deciding against a policy tightening in September.
Meanwhile, Factory orders rebounded in June following a decline in May. Of course, aircraft bookings were the key driver, while other sectors also showed considerable strength. Overall, the report indicates that the manufacturing sector is registering a recovery from the lull in the first half. Also, services industry activity peaked to almost a decade-high in July, with the majority of jobs coming from small and medium-sized employers.
Though, U.S. wage growth in the second quarter hit a 33-year low and the ADP jobs report fell short of expectations, the downside can be considered a short-term hiccup. Yes, inflationary backdrop is still acting as a hindrance, but investors should note that consumer prices in the U.S. inched up 0.1% year over year in June, marking the first rise since last December.
Core inflation rate excluding food and energy expanded to 1.8% in June from 1.7% in May. This shows that the inflation picture may not be extremely bright, but it is not too dull to restrain the Fed from opting for the much-needed policy tightening in September. As a result, rising rate worries suddenly created a stir in the market. Yields on 10-year Treasury notes jumped 8 bps in from the start of August to 2.24% (as of August 10, 2015).
Fixed-income investing had enjoyed a great show in 2014 and in the early part of 2015, especially in the longer part of the yield curve. However, the prospect of rising rates and risks to capital gains of the bond holdings have left investors nervous about the safety of their portfolio.
Given the situation, many investors are definitely dialing their money back from the bond market. At a time like this, when investors are extremely cautious about rising rate risks and stock market volatility, U.S. bonds with significant protection against potential rising rates can be good bets. Some opportunistic investors could capitalize on this backdrop in the form of inverse ETFs too (read: Two Interest Rate Hedged ETF Launches from iShares).
ProShares High Yield Interest Rate Hedged ETF (HYHG)
HYHG is an ETF which has an interest rate hedge built into its strategy as it takes a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 5.68% in 30 Day SEC terms, indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. This $133.7 million ETF was up 0.03% on August 10, 2015 (read: Hedge Rising Yields with These Junk Bonds ETFs).
ProShares Investment Grade-Interest Rate Hedged ETF (IGHG)
This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index which comprises long positions in USD-denominated investment grade corporate bonds issued by both U.S. & foreign domiciled companies while adopting short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index seeks to achieve an overall effective duration of zero.
Its 30-Day SEC yield stands at 3.77% while it charges 30 bps in annual fees. The fund was up 0.04% on August 10.
Barclays Inverse US Treasury Aggregate ETN (TAPR)
The note provides investors a unique strategy to hedge against or benefit from the rising U.S. dollar interest rates by tracking the Barclays Inverse US Treasury Futures Aggregate Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts (read: Interest Rate Speculation: A Boon for TAPR ETF).
If the price of each Treasury futures contract increases or decreases by 1% of its face value, the value of index would decrease or increase by 5% over the same period. The $22 million-fund charges 43 bps in annual fees and trades in light volume of under 5,000 shares per day on average, ensuring additional cost in the form of a wide bid/ask spread. The fund advanced about 4.7% on August 10.
US Treasury 5-year Bear ETN (DFVS)
The fund looks to track inverse movements in the yields from buying 5-year U.S. T-Notes. To do this, its underlying index tracks the returns of an investment in a weighted "short" position in relation to 5-year Treasury contracts. This $5 million-fund charges 75 bps in fees. The product was up over 0.5% on August 10.
Bottom Line
As a caveat, investors should note that these inverse products are suitable only for short-term traders as these are rebalanced on a daily basis. Still, for ETF investors who are bearish on the bond market in the near term, any of the above products could make an interesting choice (see: all the Inverse Bond ETFs here).
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PRO-HI YLD IRH (HYHG): ETF Research Reports
PRO-INV GIR HDG (IGHG): ETF Research Reports
IPATH-UST 5YBR (DFVS): ETF Research Reports
BARCLY-INV USTC (TAPR): ETF Research Reports
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