With the markets anticipating higher interest rates, investors can take a look at the first investment grade bond exchange traded fund designed to hedge against the damage caused by rising rates.
The new fund will try to reflect the performance of the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, which is comprised of long positions in USD-denominated investment grade corporate bonds issued by U.S. and foreign companies while taking short positions in U.S. Treasury notes. Essentially, the underlying index tries to achieve an overall duration of zero.
"Investors have been fleeing long-term bond funds as concerns grow over losses that might result from rising interest rates. While many investors have moved to shorter duration bond funds to lessen the impact of rising rates, they remain exposed to some interest rate risk," Michael Sapir, Chairman and CEO of ProShare Advisors LLC, said in the press release. "We are pleased to offer the first U.S. ETF to provide investors a portfolio of investment grade bonds with a built-in interest rate hedge designed to target a duration of zero."
Looking at the underlying index, credit quality breakdown includes AAA 0.7%, AA+ 3.9%, AA 6.8%, AA- 5.3%, AA+ 10.2%, A 14.7%, A- 24.7%, BBB+ 12.5%, BBB 14.7% and BBB- 6.6%.
Sector allocations include finance 32.1%, industrial services 20.4%, manufacturing 17.00%, energy 12.9%, utilities 11.1%, consumer 5.9% and transportation 0.6%.
IGHG's weighted average maturity is 14.98 years with an average yield to maturity of 1.79%. However, the effective duration is only 0.01 years - duration is a measure of a bond fund's sensitivity to changes in interest rates, so a near zero duration reflects a negligible negative effect on the fund's price when interest rates rise.
Consequently, the fund should outperform a long-only investment grade bond fund as rates rise. However, due to the short positions in Treasuries, the fund may underperform in periods of falling or static interest rates.
IGHG has a 0.30% expense ratio.
Max Chen contributed to this article.