Interest rate hedged ETFs

Introduction

An interest rate hedged ETF is an ETF that buys fixed income securities (mostly bonds) and then hedges its interest rate exposure using swaps and derivatives or by shorting U.S. treasury futures or U.S. treasury bonds. The idea is that if interest rates rise, the value of the ETF's bonds will go down, but that loss will be offset by the gain from the short positions.

There are a number of interest rate hedged ETFs in our database:

CategoryCount
Special Security Types1
US Fixed Income 8
Total9

Most interest rate hedged ETFs are relatively new:

Year of InceptionCount
20134
20142
20152
20171
Total9

Note that there might have been even more ETFs launched then this table shows, as we are only displaying the launch dates of ETFs still active in our database. There might have been more ETFs that were launched during these years that have since been closed down by their sponsor.

Here are the interest rate hedged ETFs, if you want to read some examples of the approaches taken by these ETFs:

SymbolDescriptionInception DateCategoryActions
HYHGProShares High Yield—Interest Rate Hedged ETF05/21/2013US Fixed Income Analyze
IGHGInvestment Grade Bonds - Interest Rate Hedged ETF11/05/2013US Fixed Income Analyze
AGZDWisdomTree Barclays U.S. Aggregate Bond Zero Duration ETF12/18/2013US Fixed Income Analyze
HYZDWisdomTree BofA Merrill Lynch High Yield Bond Zero Duration ETF12/18/2013US Fixed IncomeAnalyze
HYGHiShares Interest Rate Hedged High Yield Bond ETF 05/27/2014US Fixed Income Analyze
LQDHiShares Interest Rate Hedged Corp Bd ETF05/27/2014US Fixed Income Analyze
EMBHiShares Interest Rate Hedged Emerging Markets Bond ETF07/22/2015US Fixed IncomeAnalyze
IGBHiShares Interest Rate Hedged Long-term Corporate Bond ETF 07/22/2015US Fixed Income Analyze
CEFSSaba Closed-End Funds ETF03/21/2017Special Security TypesAnalyze

Are these ETFs a good idea?

Most investors are worried about owning bonds and other fixed income securities if U.S. interest rates begin to increase over the next 5-10 years. Bonds have performed well as an asset class over the past twenty years because U.S. interest rates have been in a steady decline. Bonds go up in value as interest rates decline, and down in value as interest rates go up. So these interest rate hedged ETFs are clearly trying to address a valid investor concern.

But it is really hard to know if these ETFs are a good idea for long-term investors. We don't really know the long-term cost of permanently shorting U.S. treasury futures or U.S. treasury bonds. And we don't know if there are hidden costs related to shorting U.S. treasuries or U.S. treasury futures. It also doesn't really help much to look at the index data behind these ETFs. So it is difficult to make any kind of definitive conclusion about these interest rate hedged ETFs.

Who are the intended buyers of these ETFs? It is not clear. Short-term traders would probably prefer to make a pure play trade using one of the 11 inverse ETPs related to U.S. fixed income securities. These inverse ETPs allow traders to make a short-term profit on rising interest rates. View list of inverse U.S. fixed income ETFs.

Given all of the above, we would lean towards not buying one of these interest rate hedged ETFs, mostly because we tend to believe that it is smart to avoid making an investment in something that is hard to understand or that has no track record at all. There are too many uncertainties for us.

Other Strategies

Other ways that you can change your bond portfolio if you believe that U.S. interest rates will rise significantly over the next few years include:

High yield bonds are generally believed to perform better than most bonds in a rising interest rate environment. One tool we use at ETFAnalyst.com to measure the sensitivity of a bond ETF to interest rate changes is the correlation of a bond ETF to TNX, the CBOE Ten Year Treasury Note Yield Index. The average correlation to TNX of the 50 U.S. high yield bond ETFs is 0.37. A positive correlation is important, even if it is not a very strong one, because most bond ETFs have a negative correlation to TNX (as interest rates rise, the value of the bond ETF should go down).

Bank loans should perform better than most bonds in a rising interest rate environment because bank loans generally contain floating interest rates. Most bank loans contain clauses that increase the interest rate of the loan based on a formula. But they are not a perfect hedge against rising interest rates, because many bank loans contain limits as to how much and how fast the interest rate can increase. But they are obviously less sensitive to rising interest rates than most fixed income securities. The average correlation to TNX of the 8 U.S. bank loan ETFs is 0.55.

You can use our ETF screener to screen for ETFs that have a positive correlation to TNX.


All data is a live query from our database. The wording was last updated: 07/21/2017.

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