Van Eck Global, the fund provider behind the Market Vectors ETFs, today launched a high-yield corporate bond ETF Friday that would hedge interest rate risk by shorting Treasurys, following a First Trust launch of a similar, albeit actively managed, strategy.
The Market Vectors Treasury-Hedged High Yield Bond ETF (THHY), which had its original launch date set for Feb. 20 postponed, is a long/shorstrategy tied to an in-house index that will invest in dollar-denominated, below-investment-grade corporate bonds, while shorting Treasury bonds and notes to hedge against adverse moves in interest rates. As rates move higher, bond prices drop.
THHY, after a fee waiver, will cost 1.45 percent in total annual expenses, which includes 45 basis points in management fees, 95 basis points in interest on securities sold short and cost to borrow, and 11 basis points in “other expenses.”
The fund amounts to an attempt to hedge interest rate risk and give a purer exposure to credit risk, in a strategy that’s somewhat similar to what First Trust rolled out in an actively managed wrapper earlier this year. The First Trust High Yield Long/Short ETF (HYLS) costs 1.19 percent a year.
The launch also marks yet another way ETF sponsors are meeting investor demand for income while minimizing exposure to interest rate risk at a time when rates remain pinned near zero.
While the hedging mechanism minimizes some of the rising interest rate risk, investing in junk bonds is inherently risky.
“Hedging does not eliminate credit or interest rate risk, and may result in foregone gains if interest rates decline,” the company said in the filing .
THHY’s underlying index comprises some 686 below-investment-grade bonds, including callable bonds, issued by issuers incorporated in the United States. Constituents of the long position are modified market capitalization weighted, and issuers are capped at 3 percent, the filing said.
The short side of the portfolio holds four equally weighted short positions in the current five-year U.S. Treasury note issued as of the four most recent reconstitution dates.
The fund's net long positions have an average maturity of 8.6 years while short positions average 4.46 years to maturity. Nearly 80 percent of the long portfolio is tied to industrials, followed by financials at 14.6 percent.
“The Short Portfolio and Long Portfolio of the Index are rebalanced on a monthly basis to where the dollar amount of the short exposure is equivalent to the dollar amount of the Long Portfolio’s high yield bond positions,” the filing said.
“The Short Portfolio is reconstituted on a quarterly basis where the U.S. Treasury note closest to maturity is closed and the most recently issued five-year U.S. Treasury note is sold short,” it added.
Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule and a minimum amount outstanding of $500 million.
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- interest rate risk
- Treasury bonds
- basis points