A New ETF for Rising Rates With an International Flair

ETF Trends

Fears of rising interest rates have abated somewhat this month. After yields on 10-year U.S. Treasurys touched 2.73% on July 5, they tumble to 2.5% on July 19. While an increase to 2.58% at last Friday’s close may not be alarming, that is still 45 basis points higher than what was seen at the start of June. That could be a sign to investors that the uptrend for interest rates is still in tact.

While interest rates have steadily declined over the past three decades, the recent rate spike has investors assuming, naturally, long-term Treasuries should fall – yields and bond prices have an inverse relationship, so a rising rate environment would correspond with declining bond prices. In the process, scores of rate-sensitive bond and sector ETFs have felt some, albeit temporary pain. [Rising Interest Rates Hurting These ETFs]

The good news is that there is no dearth of short duration ETFs on the market for investors to choose from in an effort to make their portfolios less vulnerable to rising long-term rates. On new ETF can help investors do just that while gaining some global exposure, too. The PowerShares Global Short Term High Yield Bond Portfolio (PGHY) is that ETF.

PGHY debuted last month featuring the following credit quality allocations: BBB 3%, BB 48%, B 24%, CCC 3% and C 21%. Importantly, PGHY’s effective duration is just 1.68 years, highlighting the new ETF’s utility as a defensive play against rising long-term rates. Duration is a measure of a bond’s sensitivity to changes in interest rates – bond funds with lower durations would be less sensitive than higher duration bond ETFs. [PowerShares Launches Global Short Duration Bond ETF]

While the U.S. does command 45.8% of PGHY’s country weight, the fund does offer significant emerging markets exposure. Five of the fund’s top-10 country weights are developing markets – Russia, Ukraine, Brazil, Venezuela and Turkey. Those countries combine for over a third of PGHY’s weight. Other countries represented in the fund include France, Finland and Canada. [Rising Interest Rates Weigh on Emerging Markets Bond ETFs]

PGHY uses a sampling methodology, meaning it does hold all of the bonds featured in the DB Global Short Maturity High Yield Bond Index, the ETF’s underlying index. As of Friday’s close, PGHY held 37 dollar-denominated issues.

While high-yield bonds generally carry higher credit risk, these bonds and the ETFs that hold them are favored by investors for robust income streams. Some U.S.-focused corporate bond ETFs did decline during the June/early July rate spike, but those funds have recaptured nearly all of those losses. Additionally, narrowing spreads between U.S. high-yield corporate debt and Treasury indicate investors are relaxing fears regarding issuer default risk.

ETF Trends editorial team contributed to this article.

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.

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