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14 Hedged Bond ETFs to Diminish Rising Rate Risks

editor@etftrends.com (ETF Trends)

A rising interest rate environment will weigh on fixed-income portfolios. Bond traders do not need to sacrifice yield-generation to diminish rate risk. Instead, investors can look to rate-hedged or zero-duration bond exchange traded funds.

A relatively new breed of interest rate-hedged, zero duration ETFs hold long-term bonds, but they will simultaneously short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise – bond prices have an inverse relationship to interest rates, so rising rates corresponds with falling bond prices.

Related: Hedged Bond ETFs Outperform as Treasury Yields Rise

Unlike traditional bond ETFs, the rate-hedged bond ETFs try to mitigate the negative effects of a rising rate environment through shorting Treasury futures to match the overall duration of their diversified bond holdings. Looking further out, these types of hedged-bond ETFs could provide suitable exposure to the fixed-income market in a rising interest environment, especially as the Federal Reserve plans on hiking rates sometime later this year.

The long/short bond ETFs can provide an alternative means to invest in fixed-income assets without sacrificing yields while diminishing the negative effects of rising rates on a bond fund’s price. Specifically, due to their near-zero durations, the bond funds should show little sensitivity to changes in interest rates.

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For example, the popular investment-grade corporate bond ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , has a 8.32 year effective duration and a 3.19% 30-day SEC yield, so a 1% increase in interest rates could translate to a 8.32% decline in the ETF’s price. Consequently, many have shifted down the yield curve to lower duration bond ETFs as a means to hedge against rising interest rates – a lower duration means that the fund would be less sensitive and exhibit a lower decline in the event of rising interest rates.

Related: Control Rate Risk Exposure with Low-Duration Bond ETFs

Alternatively, something like the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) holds short positions in interest rate swaps, which provides the rate-hedged ETF with a 0.03 effective duration – a 1% rise in interest rates would translate to a 0.03% decline in the funds price, and LQDH would still offer up a 3.43% 30-day SEC yield.

Investors who are interested in the rate-hedged bond strategy have a number of ETF options available.

Interest Rate-Hedged ETFs:

  • Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH)
  • Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(HYIH)
  • Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (EMIH)
  • iShares Interest Rate Hedged Corporate Bond ETF (LQDH)
  • iShares Interest Rate Hedged Emerging Markets Bond ETF (EMBH)
  • iShares Interest Rate Hedged 10+ Year Credit Bond ETF (CLYH)
  • iShares Interest Rate Hedged High Yield Bond ETF (HYGH)
  • Market Vectors Treasury-Hedged High Yield Bond ETF (THHY)
  • ProShares Investment Grade-Interest Rate Hedged ETF (IGHG)
  • ProShares High Yield Interest Rate Hedged ETF (HYHG)
  • WisdomTree Barclays U.S. Aggregate Bond Zero Duration Fund (AGZD)
  • WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (AGND)
  • WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (HYZD)
  • WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund (HYND)