This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

New ETF Offers Protection Against Rising Rates

NEW YORK (TheStreet) -- The bond market is becoming increasingly difficult to navigate as any positive economic news lead to fears that the Federal Reserve will start reducing its monthly asset purchases -- the so-called tapering -- causing bond prices to fall and interest rates to rise, and which is what happened last Friday when employment data was released.

The new Pro Shares Investment Grade Interest Rate Hedged ETF (IGHG) is the latest fund trying to offer protection against rising rates, but is the first fund to protect an investment grade portfolio. Like other hedged bond funds, IGHG has two portfolios side-by-side: The investment grade bond portfolio and a combination of short positions in various U.S. treasury futures contracts.

The bond portfolio component of the fund is a very simple, investment grade corporate portfolio. It is well diversified with 457 holdings of both domestic and foreign bonds; the foreign bonds are dollar denominated.

The sector breakdown favors financials at 32%, followed by industrial-service at 20% and industrial-manufacturing at 17%. The sector makeup is generally in line with more mainstream corporate bond ETFs likes the iShares iBoxx Investment Grade Corporate Bond ETF (LQD).

Must Read: Discount Retailers Holding Up Despite Weak Consumer Confidence

The current weighted average maturity of the portfolio is just under 15 years. The hedge strategy will target the same maturity as the bond portfolio and, for now, that is done with 55% short 10-year futures, 33% short 30-year futures and 12% in the Pro Shares Ultra Short 20+ Year Treasury ETF (TBT).

It's too early for any specific yield information for the fund, but the fact sheet notes the average coupon in the fund is at 5.13%, and that the average price for the bonds in the portfolio is $107.62 which gives a rough estimated yield of 4.76% for the index. Subtracting the 0.30% expense ratio for the fund could put the yield near 4.46%. However, there will likely be a drag from the cost of maintaining the hedge against rising interest that could further reduce the yield.

Another risk factor is that interest rates could go back down. That is not a prediction so much as an acknowledgement that interest rates went far lower than most people expected in the face of unprecedented Fed policy -- one which is likely to remain in place for several years.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
IGHG $74.02 0.00%
LQD $120.20 0.00%
TBT $37.44 0.00%
AAPL $95.03 0.21%
FB $116.73 0.00%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs