Ishares Files Two Actively Managed Interest Rate Hedged ETFs
The recent upbeat data on the U.S. economy has fueled expectations of a hike in interest rates and has left investors jittery about the safety of their portfolio.
Given investors’ worries about interest rates, iShares has filed for two bond ETFs which hedge interest rate risks. Both the funds – iShares Interest Rate Hedged 0-5 Year High Yield Bond ETF and iShares Interest Rate Hedged 10+ Year Credit Bond ETF – are actively managed.
iShares Interest Rate Hedged 0-5 Year High Yield Bond ETF
As per the SEC filing, the proposed actively managed ETF looks to mitigate the interest rate risk of a portfolio, composed of U.S. dollar-denominated high yield corporate bonds with remaining maturities of less than five years (read: 3 ETFs to Watch on Rising Rates).
Moreover, the fund will build short positions in both U.S. Treasury futures contracts and interest rate swaps to hedge the portfolio against interest rate risk. The product might also invest in other ETFs, U.S. government securities, options short-term paper and cash and cash equivalents.
iShares Interest Rate Hedged 10+ Year Credit Bond ETF
According to the Sec filing, this product also seeks to protect a portfolio comprising investment-grade U.S. corporate bonds and U.S. dollar-denominated bonds, including those of non-U.S. corporations and governments, with remaining maturities greater than 10 years, from interest rate risk.
Like the above product, this fund too may build short positions in U.S. Treasury futures contracts and interest rate swaps to hedge the portfolio against interest rate risk (read: Short Rate-Sensitive Securities with These ETFs).
How Does it Fit in a Portfolio?
The U.S. economy has been doing well since the start of the year, led by a strengthening domestic economy, an improving job picture and positive housing data. As a tangible proof, the U.S. economy has added 295,000 jobs in February, marking the 12th straight month of the economy adding more than 200,000 jobs. Moreover, the unemployment rate now stands at 5.5%, the lowest since May 2008.
The recent upbeat jobs data has raised expectations that the Federal Reserve may hike interest rates as early as June, rather than in the third quarter of 2015, as previously estimated. Given that investors are extremely cautious about rising rate risks, investments in U.S. bonds having significant protection against potential rising rates can be a good bet (read:5 Ways to Play Rising Rates with Hedged & Inverse ETFs).
Future Competition
Though there are quite a many choices in the investment grade corporate bond space, there are just a few bond ETFs available with a hedge against interest rates.
In the high yield space, ProShares High Yield-Interest Rate Hedged ETF (HYHG), WisdomTreeBofA Merrill Lynch High Yield Bond Zero Duration Fund (HYZD) and Market Vectors Treasury-Hedged High Yield Bond ETF (THHY) are some of the names that also take short positions in U.S. treasuries and might pose as competitors for the proposed fund, if launched (see all High-Yield/Junk Bond ETFs here).
However, options are far less in the investment grade bond ETF space. ProShares Investment Grade-Interest Rate Hedged ETF (IGHG), which too offers interest-hedge benefit to investors, is one such fund.
Thus, the proposed ETFs, if launched, are likely to have a fair chance of attracting assets, though they might face some amount of competition.
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