The problem is that all of this is very confusing and quite difficult for the average person. It takes a lot of knowledge to hedge a bond portfolio with swaps and options. But luckily she is ETF Boom has created some easy-to-purchase options designed to hedge duration risk.
These funds either buy derivatives to hedge risk or create a long/short bond portfolio to reduce losses and essentially do the heavy lifting for you. And for many of them, they can significantly reduce the duration while generating a high return. There is no interest rate risk, the credit risk remains. And they do it at a lower cost than you or I could do alone.
And the proof is in the pudding. For example the ProShares High Yield – Interest Rate Hedged ETF (HYHG), which owns junk bonds while hedging duration, fell just 1.69% over the past year. The investment grade iShares Interest-hedged corporate bond ETF (LQDH) declined only 1.33%. This is far better than the respective industry average in the past year. Better still, both offer compelling yields of 8.04% and 3.21%, respectively, which are in line with their industry averages.
Well, fixed rate ETFs aren’t a panacea. If interest rates were falling, the Funds’ returns would be lower than their unhedged counterparts. But given the Fed’s continued stance and outlook on the pace of rate hikes still accelerating, they could be a good bet.
And with funds from many top ETF For providers covering most segments of the bond market, including the benchmark bond index, it pays to add some exposure to a hedged ETf for the current environment. It could save your portfolio from losses and still provide ample income.
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