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A Winning Bond ETF For Rising Rates

This article was originally published on ETFTrends.com.

Last week, the Federal Reserve hiked interest rates for the third time this year, setting the stage for another rate hike in December and several more interest rate increases in 2019. Some fixed income exchange traded funds, including the iShares Interest Rate Hedged Corp Bd ETF (NYSEArca: LQDH), are built for the current rate environment.

LQDH seeks to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, investment-grade corporate bonds without being tied to an underlying index. LQD is actively-managed and seeks to invest in one or more underlying funds that principally invest in investment-grade bonds, and in U.S. Treasury securities (or cash equivalents). Active management allows for more flexibility for adjustments given the current market conditions vis-a-vis in-game adjustments by a baseball manager.

“So if you have a view that rates will rise across the yield curve but still want to hold corporate or emerging market bonds, an interest rate hedged ETF will allow you to express that view,” said BlackRock in a recent note. “These bonds might also offer more income than floating rate or short-maturity bonds, as they provide exposure to issues that are farther out on the yield curve. (Longer-maturity bonds typically yield more than their shorter counterparts.)”

LQDH ETF Details

LQDH is the rate-hedged answer to the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , the largest corporate bond ETF. LQDH holds LQD with short positions in interest rate swaps. LQDH “seeks to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, investment grade corporate bonds,” according to iShares.

LQDH, which tracks the Markit iBoxx USD Liquid Investment Grade Interest Rate Hedged Swaps Index, has an effective duration of 0.10 years.

Related: Why Fed Rate Hikes Won’t Hurt Economic Growth

The yield on the iShares Interest Rate Hedged Corporate Bond ETF (LQDH) is lower than that of its parent, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD); that’s primarily due to the 'yield' or cost of being short interest rates via the swaps. Yet it’s still higher than the short-maturity and floating rate ETFs,” according to BlackRock.

LQDH has a 30-day SEC yield of 3.62% compared to 4.13% on the unhedged LQD. LQDH charges 0.24% per year, or $24 on a $10,000 investment, which is favorable among actively-managed ETFs.

For more trends in fixed income, visit the Rising Rates Channel.