Treasury-Hedged Junk Bond ETF Outperforms As Rates Rise

| About: VanEck Vectors (THHY)


An outperforming junk bond ETF that hedges against rising interest rates.

How the Treasury-Hedged High Yield Bond ETF works.

Comparison to popular speculative-grade debt ETFs.

As investors rushed back to the fixed-income market this year, speculative-grade debt has been strengthening. However, with Treasury yields rising again, one rate-hedged junk bond exchange traded fund has been outperforming.

The Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA:THHY) has jumped 6.0% over the past month, whereas the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) increased 0.7% and SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK) gained 0.9%.

The Market Vectors ETF provides another option to access high-yield junk bonds. Specifically, the fund's underlying index employs a type of long/short strategy where it will go long junk bonds and short 5-year Treasury bonds to hedge against adverse movements in interest rates.

Because the ETF balances its long exposure to junk debt with short exposure to Treasury bonds, the investment has an effective duration of -0.12 years. Essentially, a 1% increase in rates would translate to a 0.12% gain for the fund.

Over the past month, yields on 5-year Treasury notes climbed around 91 basis points to 1.73% - bonds have an inverse relationship with yields, so a rising rate corresponds with a falling bond price. Consequently, THHY has been profiting off its short exposure to 5-year notes as Treasury prices declined.

Along with its exposure to short Treasury positions, THHY includes non-investment grade debt securities rated BB 52.0%, B 34.1%, CCC 12.8%, CC 0.2% and C 0.5%.

THHY has a 3.68%, 30-day SEC yield and a 0.8% expense ratio.

However, potential investors should be aware that the Treasury-hedged junk bond ETF could underperform other speculative-grade debt investments in a so-called risk-off environment where U.S. Treasuries rally on safe-haven demand and high-yield bonds decline.

In contrast, the iShares and State Street offerings just provide long exposure to speculative grade, high-yield bonds. HYG has a 3.91 year duration and JNK shows a 4.12 year duration - a 1% increase in interest rates would translate to about a 3.9% decline in HYG and a 4.1% dip in JNK.

HYG has a 4.22%, 30-day SEC yield and a 0.50% expense ratio. JNK has a 4.69%, 30-day SEC yield and a 0.40% expense ratio.

Disclosure: The author is long HYG, JNK. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.