iShares Plans Active Interest Rate Hedged Bond ETFs

ETF Trends

With the threat of rising interest rates looming over the bond market, BlackRock’s iShares, the world’s largest ETF issuer, is working on a handful of active bond exchange traded funds to help investors hedge against rate risk.

BlackRock recently filed for three actively managed “interest rate hedged” bond ETFs.

According to a filing, the iShares Interest Rate Hedged Emerging Markets Bond ETF will try to mitigate interest rate risk of a portfolio composed of U.S. dollar-denominated, emerging market bonds. The fund will include bonds from the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) but hedge against rate risk by going short U.S. Treasuries.

According to a filing, the iShares Interest Rate Hedged 10+ Year Credit Bond ETF will try to mitigate the interest rate risk of a portfolio composed of investment-grade U.S. corporate bonds and U.S. dollar-denominated bonds, including those of non-U.S. corporations and governments, with remaining maturities greater than ten years. The active ETF will include bonds from the iShares 10+ Year Credit Bond ETF (CLY) but hedges against rate risk through short positions in U.S. Treasury futures.

According to a filing, the iShares Interest Rate Hedged 0-5 Year High Yield Bond ETF will try to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. The fund will hold bonds from the iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) but hedges against rate risk through short positions in U.S. Treasuries.

“The broad consensus is that rates will rise at some point in the next few years,” said Alex Bryan, a fund analyst with Morningstar Inc., said in an InvestmentNews article. “If [iShares] investors are concerned about rising rates, this might be a way to ease these concerns.”

Bryan argues that the hedging strategy can offset the negative impact of rising rates. Bonds and interest rates have an inverse relationship, so rising rates typically correspond with falling bond prices.

“I think it’s a reasonable strategy, at least for the two U.S. funds,” Bryan added.

The interest rate risk in the U.S., though, may not be the same in the emerging markets. Consequently, the hedged position could weaken the active emerging market bond ETF relative to an unhedged version.

ProShares recently launched a similar strategies. For instance, the ProShares Investment Grade-Interest Rate Hedged ETF (IGHG) and the ProShares High Yield Interest Rate Hedged ETF (HYHG) are comprised of long positions in USD-denominated corporate bonds issued by U.S. and foreign companies and take short positions in U.S. Treasury notes. [Alternative ETFs Mitigate Rising Rates Risk]

For more information on new fund products, visit our new ETFs 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.

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