For investors worried about rising interest rates, the new vehicles could be useful.
BlackRock Inc.’s iShares unit has filed with the Securities and Exchange Commission to create three new actively managed bond exchange-traded funds that aim to hedge out interest rate risk, a rising fear for U.S. bond investors.
“The broad consensus is that rates will rise at some point in the next few years,” said Alex Bryan, a fund analyst with Morningstar Inc. “If [iShares] investors are concerned about rising rates, this might be a way to ease these concerns.”
Indeed, interest rate fears have led to more than $70.7 billion of net outflows from bond funds and ETFs year-to-date through the first week of December, surpassing the previous record of $62.5 billion in 1994, according to Trim Tabs research.
The proposed set of products from iShares include an interest-rate-hedged zero- to five-year high-yield bond ETF, an interest-rate-hedged 10-plus year credit bond ETF, and an interest-rate-hedged emerging- markets bond ETF and. All three invest in the specified asset class while offsetting the interest rate risk through a hedge with U.S. Treasury futures.
Mr. Bryan said if rates rise in the U.S., the hedged position of the funds is likely to offset the negative impact. For the emerging-markets ETF, the interest rate risk in the U.S. may not necessarily be the same as the interest risk in the underlying fund, which could weaken the hedge somewhat.
“I think it’s a reasonable strategy, at least for the two U.S. funds,” he said.
BlackRock spokeswoman Melissa Garville declined to comment because the funds are in registration.
Hedging out interest rates isn’t necessarily the perfect solution.
ProShares launched the first interest-rate-hedged high yield bond ETF in late May, and from June to Sept. 6, when the 10-year Treasury’s interest rate soared almost 100 basis points to 2.93%, the ProShares High Yield Interest Rate Hedged ETF (HYHG) lost 0.5%, while the unhedged iShares iBoxx High Yield Corporate Bond ETF (HYG) lost 1.94%, according to Morningstar Inc.
Since then, rates have dropped to 2.81%, from 2.94%, and the performance figures have reversed. The iShares ETF is up 2.9% while the ProShares ETF is up 0.13%.