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A New ETF Uses Other ETFs To Manage Rate Risk

ETF Professor

Several of this year's top asset-gathering fixed income exchange traded funds are of the low or ultra-low duration varieties, indicating investors' preference for bonds that are less sensitive to rising interest rates.

A new ETF courtesy of IndexIQ, a unit of New York Life Investments Company, seizes upon that theme.

What Happened

The IQ Short Duration Enhanced Core Bond U.S ETF (NYSE: SDAG) debuted Tuesday as the second new ETF introduced by IndexIQ over the past week. SDAG follows the IQ Short Duration Enhanced Core Bond U.S. Index, a benchmark comprised of other ETFs.

The fund is IndexIQ's first short duration ETF and its sixth fixed income ETF. IndexIQ launched its first bond ETF over two and a half years ago.

Why It's Important

The ETFs comprising SDAG's lineup include short-term Treasury funds, floating rate note products and short-term corporate bond ETFs. SDAG's largest holding is the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VSCH). The $20.6 billion VCSH, which has an average duration of 2.7 years, commands 34.49 percent of SDAG's weight.

The Schwab Short-Term U.S. Treasury ETF (NYSE: SCHO) is SDAG's second-largest holding at a weight of almost 28 percent. The $3.8 billion SCHO has an effective duration of 1.93 years.

"After several years of abnormally low rates, we once again find ourselves in a rising rate environment, a situation where investors often move to the shorter end of the yield curve,” said Index IQ Chief Investment Officer Salvatore Bruno in a statement. “ By combining short duration exposure with a momentum-driven approach, investors now have a powerful tool for gaining exposure to this key area of the fixed income market while also adding the potential for outperformance.”

What's Next

SDAG's holdings are dynamically allocated based on 45- and 90-day momentum signals. The new ETF can include short-term high-yield debt. Two of SDAG's eight holdings are short-duration junk bond funds. Those ETFs combine for nearly a quarter of SDAG's weight.

SDAG charges 0.36 percent per year, or $36 on a $10,000 investment.

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