As rates rise, bond funds will suffer. However, exchange traded fund investors can gain exposure to high-yield fixed-income assets with a built-in interest rate hedge.
The ProShares High Yield Interest Rate Hedged ETF (BATS:HYHG) tries to reflect the performance of the Citi High Yield (Treasury Rate-Hedged) Index, which tracks a basket of high-yield bonds with a built-in hedge against rising interest rates. HYHG has a 0.50% expense ratio and a 5.69% 30-day SEC yield.
The fund tracks bond securities issued from the U.S. or Canada with at least one year remaining to maturity. Additionally, no more than two securities can come from the same issuer and the index has a 2% cap to any single issuer.
As of July 1, the ETF has an effective duration of 0.00 years. Duration is a measure of the fund's sensitivity to changes in interest rates. A low duration typically corresponds with a lower interest rate risk. Interest rates have an inverse relationship to bond prices - rising rates translates to falling bond prices.
HYHG achieves a near negligible duration by taking short positions in Treasury securities. According to ProShares, "the hedge is designed to have sensitivity to interest rates equivalent to the long high yield bond portfolio."
Specifically, the index has a hedged allocation in short-treasury positions including 2-year Treasuries 22.8%, 5-year Treasuries 32.7% and 10-year Treasuries 42.4%.
Sector long high-yield allocations include industrial services 35.0%, industrial manufacturing 25.4%, industrial energy 15.9%, utilities 9.8%, industrial consumer 4.8%, utilities other 3.3%, utilities electricity 2.0%, finance banks 2.0% and finance independent 1.9%.
The index credit quality breakdown includes speculative grade debt BB 44.3%, B 41.6% and CCC or lower 14.2%.
Max Chen contributed to this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.