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Negative Duration Bond ETFs to Watch Amid Rising Yields

Sweta Killa
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Growing inflationary expectations and a booming economy have lately led to an uptrend in Treasury yields. Notably, yields on 10-year Treasury notes increased from 2.465% at the start of this year to 2.902% in the earlier session on Monday — the highest level in more than four years. It is currently hovering around


The most recent surge in yields came from solid January job numbers. The government report showed that Americans saw huge gains in pay amid better-than-expected hiring, indicating a solid start to 2018 for the job market. The economy added 200,000 jobs in January, edging past analysts’ expectation of 180,000 while the unemployment rate held steady at 4.1% — its lowest level since December 2000. Meanwhile, average hourly wages rose 0.3%, pushing the year-over-year increase to 2.9%, marking the fastest pace in more than eight years. Robust job numbers sparked a wave of inflation and thereby speculation of aggressive monetary policy tightening (read:

Sector ETFs Set to Soar Post Strong January Job Data).

According to Goldman, yields will continue to rise as high as 3.5% in the next six months as the market prices in a steeper pace of Federal Reserve tightening.

As yields continue to move up, it would hurt the returns of investors, who have big holdings in the fixed income world. If this happens, bond investors might experience heavy losses given that bond prices and yields have an inverse relationship. With the inclusion of some negative duration bond ETFs, this hostile situation can be avoided. Investors could add these products in their portfolio to minimize the risk from rising interest rates.

Why Negative Duration Bond ETFs?

These funds cushion against rising rates through an inverse exposure to Treasuries and increase value when rates rise.

Negative duration bond ETFs offer exposure to traditional bonds while at the same time short Treasury bonds using derivatives such as interest-rate swaps, interest-rate options and Treasury futures. The short position will diminish the funds’ actual long duration, resulting in a negative duration. As a result, these bonds could act as a powerful hedge and a money enhancer in a rising rate environment (read:

10 Hottest ETF Themes for 2018).

Currently, there are two negative duration bond ETFs available on the market that investors could play for rising rates with lower levels of risk. Both are from the same issuer, WisdomTree, and are hitting new highs lately.

WisdomTree Barclays Negative Duration U.S. Aggregate Bond Fund AGND

This ETF tracks the Bloomberg Barclays Rate Hedged U.S. Aggregate Bond Index, Negative Five Duration, Negative Five Duration. The benchmark provides long positions in Bloomberg Barclays U.S. Aggregate Bond Index, which consists of Treasuries, government bonds, corporate bonds, mortgage-backed pass-through securities, commercial MBS & ABS, while short positions in U.S. Treasuries corresponding to duration exceeding the long portfolio of approximately negative five years (read: Negative Duration Bond ETF Hits New 52-Week High).

About 68% of the portfolio is focused on investment grade or AAA rated bonds. The fund has amassed $30.9 million in its asset base while trades in a paltry volume of around 10,000 shares. Expense ratio comes in at 28 bps. The product has gained 1.7% so far this year.

WisdomTree Negative Duration High Yield Bond Fund HYND

This fund tracks the BofA Merrill Lynch 0-5 Year US High Yield Constrained, Negative Seven Duration Index. The benchmark is a combination of the long and short portfolio. The long portfolio replicates the BofA Merrill Lynch 0-5 year US High Yield Bond Index, capturing non-investment grade corporate debt securities issued in the United States and maturing in five years. The short portfolio holds short positions in U.S. Treasuries that surpass the duration of the long portfolio, resulting in a targeted total duration of approximately negative seven years (see: all the Total Bond Market ETFs here).

The fund puts heavy focus on junk bonds (BB or lower). It is often overlooked by investors given its AUM of $14.8 million and average daily volume of nearly 4,000 shares. It charges a little higher fee of 48 bps and has gained 3.7% so far this year.  

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