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Hedging Risk with Safe-Haven, Treasury Bond ETFs


Treasury bond exchange traded funds have been some of the most popular investments over the past week as investors turn to safer assets to hedge against the current bout of volatility.

Specifically, the iShares 1-3 Year Treasury Bond ETF (SHY) was the most popular ETF for the week ended Feb. 7, bringing in $3.6 billion in new assets, according to ETF.com.

Along with its safe-haven appeal, SHY may have also acted as a cash substitute as the fund shows a low duration of 1.82 years and a 0.22% 30-day SEC yield. The low duration helps the fund weather changes in interest rates. Specifically, with an average duration of 1.82 years, the value of SHY’s portfolio would decline about 1.8% given a 1% increase in interest rates. However, the relative conservative nature of this fund means that investors should not expect outsized returns as the ETF has only gained 0.2% year-to-date. [ETF Chart of the Day: Got Good Credit?]

On the other end of the spectrum, the iShares 20+ Year Treasury Bond ETF (TLT) has gained 5.0% year-to-date and typically outperforms in volatile market conditions. TLT comes with a 16.38 year duration, which means a 1% rise in interest rates could translate to a 16.4% dip in the bond fund’s price, but offers a 3.51% 30-day SEC yield. [Treasury ETFs: A Contrarian Play for 2014]

In between, investors can also tailor their Treasury bond exposure with iShares 3-7 Year Treasury Bond ETF (IEI) , which has a 4.48 year duration and a 1.27% 30-day SEC yield, and the iShares 7-10 Year Treasury Bond ETF (IEF) , which has a 7.48 year duration and 2.40% 30-day SEC yield. IEF has gained 2.7% and IEI rose 1.2% year-to-date.

“We see this fund serving two primary purposes in an investor’s portfolio,” according to Morningstar analyst Timothy Strauts. “The first is that it is suitable as a component of the fixed-income allocation in a diversified portfolio. The other is as a safe haven for an investor’s funds during extreme market turmoil. This is because government bonds are negatively correlated with the stock market.”

Even as a safe-haven play, Treasury bond investors will have to weigh their tolerance to interest rate risk. Longer duration Treasury bond funds are more vulnerable to rising interest rates, but in return, investors may enjoy higher yields and potentially better returns in short-term, risk-off environments.

For more information on Treasuries, visit our Treasury bonds category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.