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.
Here are the interest rate hedged ETFs, if you want to read some examples of the approaches taken by these ETFs:
| Name | Symbol | Last price | Currency |
|---|---|---|---|
| Saba Interest Rate Hedged CEF | BATS:CEFS | 21.71 | USD |
| Proshr Hy Hdg Ir | BATS:HYHG | 65.48 | USD |
| Wdbf Ml Hy Bd Zr | XNAS:HYZD | 22.33 | USD |
| iShares IntRate Hedged Corp Bond | ARCX:LQDH | 92.58 | USD |
| Wsdm Tb Us Ab Zr | XNAS:AGZD | 22.51 | USD |
| ProShares Investment Grade-Interest Rate Hedged | BATS:IGHG | 78.31 | USD |
| iShares IntRate Hedged Hi-Yield Bond | ARCX:HYGH | 85.98 | USD |
| iShares Interest Rate Hedged Long-Term Corporate Bond ETF | ARCX:IGBH | 24.23 | USD |
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 8 inverse ETPs related to U.S. fixed income securities. These inverse ETPs allow traders to make a short-term profit on rising interest rates.
Given all of the above, just be careful.
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 are discussed in our article ETFs for rising rates.