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A Duration-Trimming ETF Idea


On the back of May’s ebullient jobs data released last Friday, 10-year Treasury yields surged 4.1% to 2.4%. Yields on those government bonds surged nearly 13% last week as traders upped bets the Federal Reserve will raise interest rates this year.

Fed funds futures show a 53% chance of that happening following the central bank’s October meeting. Low duration fixed income exchange traded funds can help investors cope with the rising rates conundrum. Enter the Guggenheim Enhanced Short Duration Bond (GSY) , an ETF that has added over $5 million in new assets this quarter.

Though it is not a money market fund, GSY and its 0.23 years duration, is an alternative to such a strategy. The ultra-short-duration bond ETF can be used to weather a rising rate environment. Furthermore, if the consumer prices continue to fall and we end up with persistent deflationary pressures, the purchasing power of the U.S. dollar increases. Consequently, investors can also look at a short-term ETF that act as cash alternatives. [ETF Options to Hedge Against Falling Prices, Low Inflation]

GSY juices its yield (and returns) with non-investment grade fare. The ETF holds 15% of its portfolio “in high-yield debt to a portfolio of mostly investment-grade corporate and government bonds that mature in less than a year,” according to Bloomberg.

Investors with long-duration bonds face a deeply discounted market when attempting to sell the security before maturity since rates are more likely to rise in in the long-term. Long-term bonds have more coupon payments left before the debt matures than short-term bonds. Consequently, if the interest rate rises, the long-term bond will be underpaying investors for a longer period, which makes the old debt security less attractive to investors.

Fixed income investors betting that a rate hike is imminent should move to the shorter end of the yield curve, which GSY helps with. By moving down the yield curve, short-duration bond ETFs will experience smaller swings in a rising rate environment. For instance, a 1% rise in interest rates would only correspond to modest, if any, losses for ETFs like GSY. [Focus on Short Duration Bond ETFs]

The yield and bond’s price have an inverse relationship, so bond funds with long durations would experience large price drops if rates were to rise. In contrast, short-duration bond funds will experience more muted volatility in case of sudden rate changes.

Guggenheim Enhanced Short Duration ETF