ProShares has launched the ProShares High Yield – Interest Rate Hedged (HYHG), a high yield bond exchange-traded fund that uses Treasury futures to provide a built-in hedge against rising interest rates.
The value of high yield bonds—like that of all bonds—can be negatively affected by rising rates. HYHG maintains short positions in two-, five- and 10-year US Treasury futures contracts to hedge its portfolio against possible rate increases.
“We believe that many investors in high yield bond funds may be focused on credit risk but overlook the risk presented by rising rates. When rates go up, they could be in for an unpleasant surprise,” says Michael Sapir (pictured), chairman and chief executive of ProShare Advisors. “HYHG provides the opportunity to invest in this attractive asset class with less interest rate sensitivity than alternative solutions, including short duration high yield bond funds.”
HYHG seeks to track the performance of the Citi High Yield (Treasury Rate-Hedged) Index. The index seeks to provide diversified exposure to a liquid portfolio of high yield bonds while seeking to mitigate the impact of interest rate movements. The bonds included are US dollar denominated high yield corporate bonds issued by companies based in the US or Canada. To be included in the index, bonds must have a minimum issue size of USD1bn, be issued within the past five years and have at least one year remaining to maturity. No more than two issues from an issuer are allowed, and no more than two per cent of the index is allocated to a single issuer.
The interest rate hedge included in the index is composed of short positions in Treasury securities. The hedge is designed to have sensitivity to interest rate changes approximately equivalent to the long high yield portion of the index. The index does not attempt to mitigate other factors influencing the price of high yield bonds, such as credit risk, which may have a greater impact on high yield bond prices than changes in interest rates.
