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New High Yield Bond Fund Hedges Out Interest Rate Risks

NEW YORK ( TheStreet) -- There are several risks to investing in the bond market. The big risk five years ago was credit risk; the risk that companies would default. Many companies' fortunes have improved since the financial crisis and many analysts believe that risk of default has decreased.

Another form of risk to investing in the bond market is interest rate risk which is the consequence of holding longer dated bonds when interest rates move higher. As a rule of thumb the price on a 10 year bond will drop by about 8% for each percentage point that interest rates increase.

If an investor owns an individual bond when this happens then they can wait until maturity and get all of their money back at the bond's par value but they will be stuck with a bond that is paying them less than the prevailing market. With a bond fund there is no par value to return back to, a bond fund can go down and stay down.

It is with these risks in mind that Pro Shares launched the High Yield-Interest Rate Hedged ETF (HYHG). HYHG is one of several recently listed ETFs targeting the high yield market and there have also been several funds that seek to hedge out the risk of rising interest rates and HYHG does both.

The fund has two strategies under the hood. One is simply a portfolio of high yield bonds. The average maturity is seven years and there are specific rules on how the bond portfolio is constructed. No more than 2% of the portfolio can come from the same issuing company. All of the bonds in the portfolio must come from issues that are at least $1 billion.

The largest sector in the portfolio is industrial service at 36% of the fund followed by industrial manufacturers 24% and energy at 17%. There are other smaller sector exposures including financials which only make up 4% of the portfolio.

The credit quality breakdown of the fund is 43% each in BB and B rated issues with the remainder in CCC or lower. ProShares is reporting a yield of 5.69% but the fund has only been trading since late May and only paid three dividends up to this point, any future payouts could be more or less than the current 5.69%.

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