IGHG Targets Zero Duration
“We believe that the strong flows into our interest rate hedged ETFs demonstrate investor interest in going beyond short-term bond funds to protect against rising rates,” said
While the short duration of short-term bond funds may provide some protection against rising rates, IGHG and HYHG go beyond short-term bond funds by targeting a duration of zero. Duration is a measure of price sensitivity to interest rate changes—the lower the duration, the less sensitive an investment should be. IGHG and HYHG target zero duration by combining a portfolio of corporate bonds with short Treasury futures positions that provide a built-in hedge.
IGHG follows the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, a U.S. dollar-denominated index that measures the performance of investment grade corporate debt. The index consists of a long position in investment grade corporate bonds and a duration-matched short position in U.S. Treasury bonds. The investment grade portion of the index offers exposure to the more liquid, cash-pay bonds. Each issuer is limited to 3% of the market value of the investment grade corporate position of the index.
The short position in U.S. Treasury securities attempts to hedge the duration and yield curve exposure of the long position in the investment grade bonds in the Index. This strategy seeks to mitigate the negative impact of rising U.S. Treasury interest rates on the performance of investment grade bonds. Conversely, the strategy may limit the positive impact of falling interest rates.
In the ETF, the short position in U.S. Treasury securities is constructed using three U.S. Treasury securities corresponding to the 10-Year U.S. Treasury Note Futures, U.S. Treasury Bond Futures and
Investing involves risk, including the possible loss of principal. These ProShares ETFs are diversified and entail certain risks, including risks associated with the use of derivatives (swap agreements, futures contracts and similar instruments), imperfect benchmark correlation, leverage and market price variance, all of which can increase volatility and decrease performance. Bonds will decrease in value as interest rates rise. High yield bonds may involve greater levels of credit, liquidity and valuation risk than for higher-rated instruments. Short positions lose value as security prices increase. Narrowly focused investments typically exhibit higher volatility. Please see their summary and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its investment objective.
IGHG and HYHG do not attempt to mitigate factors other than rising Treasury interest rates that impact the price and yield of corporate bonds, such as changes to the market’s perceived underlying credit risk of the corporate entity. IGHG and HYHG seek to hedge investment grade bonds and high yield bonds, respectively, against the negative impact of rising rates by taking short positions in Treasury futures. These positions lose value as Treasury prices increase. Investors may be better off in a long-only investment grade or high yield investment than investing in IGHG or HYHG when interest rates remain unchanged or fall, as hedging may limit potential gains or increase losses. No hedge is perfect. Because the duration hedge is reset on a monthly basis, interest rate risk can develop intra-month, and there is no guarantee the short positions will completely eliminate interest rate risk. Furthermore, while IGHG and HYHG seek to achieve an effective duration of zero, the hedges cannot fully account for changes in the shape of the Treasury interest rate (yield) curve. IGHG and HYHG may be more volatile than a long-only investment in investment grade or high yield bonds. Performance of IGHG and HYHG could be particularly poor if investment grade or high yield credit deteriorates at the same time that Treasury interest rates fall. There is no guarantee the fund will have positive returns.
“CITI” is a trademark and service mark of Citigroup Inc. or its affiliates, is used and registered throughout the world, and has been licensed for use by
Carefully consider the investment objectives, risks, charges and expenses of