5 Ways To Play Rising Rates With Hedged and Inverse ETFs

percent rateThe recent U.S. labor market data yet again corroborated the sturdy U.S. economic growth. While weak wage growth has been bothering the investing world for quite some time, a better-than-expected average hourly earnings data finally wiped out investors’ fears.

In this backdrop, most have started speculating a sooner-than-expected hike in the Fed interest rates, which have been at a rock-bottom level for long. Yields on 10-year Treasury notes crossed the 2% mark on February 10 for the first time after January 8, 2015.

Fixed-income investing had enjoyed a great show in 2014 and so far in 2015, especially in the longer part of the yield curve. However, the prospect of rising rates and risks to capital gains of the bond holdings have left investors jittery about the safety of their portfolios and brought rate rise worries back on the table.

Given the situation, many investors are definitely pulling their money out of the bond market. At a time like this when investors are extremely cautious about rising rate risks and stock market volatility, investments in U.S. bonds with significant protection against potential rising rates can be good bets. Some opportunistic investors could capitalize on this backdrop in the form of inverse ETFs too.

Interest Rate Hedged High Yield Bond ETF (NYSEARCA:HYGH)

This fund holds in its basket iShares iBoxx $ High Yield Corporate Bond ETF (HYG) while taking short positions in U.S. Treasury futures to diminish rising rate concerns. HYGH has a weighted average maturity of 4.60 years while its effective duration stays ultra-low at 0.32 years. HYGH is high yield in nature as evident from its 30-day SEC yield of 5.47%. HYGH charges 0.55% of expense ratio. The fund has added about 2% in the last five trading sessions (as of February 10, 2015).

ProShares High Yield Interest Rate Hedged ETF (BATS:HYHG)

HYHG is another ETF which has an interest rate hedge built into its strategy as it takes a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 5.9% in 30 Day SEC terms, indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. This $125.4 million ETF was up 1.9% in the last five trading sessions (as of February 10, 2015).

ProShares Investment Grade-Interest Rate Hedged ETF (BATS:IGHG)

This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index which comprises long positions in USD-denominated investment grade corporate bonds issued by both U.S. & foreign domiciled companies while adopting short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index seeks to achieve an overall effective duration of zero.

Its 30-Day SEC yield stands at 3.32% (as of February 10, 2015) while it charges 30 bps in annual fees. The fund was up 1.1% in the last five trading sessions (as of February 10, 2015).

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