Treasury-Hedged Junk Bond ETF Outperforms as Rates Rise

ETF Trends

As investors rushed back to the fixed-income market this year, speculative-grade debt have been strengthening. However, with rates Treasury yields rising again, one rate-hedged junk bond exchange traded fund has been outperforming.

The Market Vectors Treasury-Hedged High Yield Bond ETF (THHY) has jumped 6.0% over the past month, whereas the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) increased 0.7% and SPDR Barclays High Yield Bond ETF (JNK) gained 0.9%. [Fed Speak Reignites Love for Big Junk Bond ETF]

The Market Vectors ETF provides another option to access high-yield, junk bonds. Specifically, the fund’s underlying index employs a type of long/short strategy where it will go long junk bonds and short 5-year Treasury bonds to hedge against adverse movements in interest rates. [Long/Short Bond ETFs That Hedge Against Rising Rates]

Because the ETF balances its long exposure to junk debt with short exposure to Treasury bonds, the investment has an effective duration of -0.12 years. Essentially, a 1% increase in rates would translate to a 0.12% gain for the fund.

Over the past month, yields on 5-year Treasury notes climbed around 91 basis points to 1.73% – bonds have an inverse relationship with yields, so a rising rate corresponds with a falling bond price. Consequently, THHY has been profiting off its short exposure to 5-year notes as Treasury prices declined.

Along with its exposure to short Treasury positions, THHY includes non-investment grade debt securities rated BB 52.0%, B 34.1%, CCC 12.8%, CC 0.2% and C 0.5%.

THHY has a 3.68% 30-day SEC yield and a 0.8% expense ratio.

However, potential investors should be aware that the Treasury-hedged junk bond ETF could underperform other speculative-grade debt investments in a so-called risk-off environment where U.S. Treasuries rally on safe-haven demand and high-yield bonds decline.

In contrast, the iShares and State Street offerings just provide long exposure to speculative grade, high-yield bonds. HYG has a 3.91 year duration and JNK shows a 4.12 year duration – a 1% increase in interest rates would translate to about a 3.9% decline in HYG and a 4.1% dip in JNK.

HYG has 4.22% 30-day SEC yield and a 0.50% expense ratio. JNK has a 4.69% 30-day SEC yield and a 0.40% expense ratio.

For more information on speculative-grade debt, visit our junk bonds category.


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