Tags: ETFs | rising | interest | rates

ETFs That Hedge Against Rising Interest Rates Sprout

By    |   Monday, 14 April 2014 11:09 AM

You can now purchase exchange-traded funds (ETFs) designed to protect you from rising interest rates.

Money management firms, including BlackRock, have begun or filed to begin at least 17 of these ETFs in the six months through March, according to Morningstar, The Wall Street Journal reports.

That equals the total of the previous three years put together. The ETFs, called zero duration or negative duration funds, have assets of about $430 million, according to The Journal.

Editor's Note:
Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

The way the funds usually work is to buy long-term bonds and short Treasurys or Treasury futures. The short position protects against losses if rates rise.

The funds may find a receptive audience. "It's probably the main question we get from clients: 'How will you protect me from rising rates?'" Jason Gunkel, a senior financial analyst at Sherpa Investment Management, tells The Journal.

While the 10-year Treasury yield has slipped to 2.62 percent from 3.04 percent Dec. 31, many economists expect rates to head higher later this year.

To be sure, experts urge caution in buying the funds, due to risks and costs that aren't obvious, The Journal reports. For example, these ETFs typically have an annual expense ratio of less than 0.5 percent, compared with 0.3 percent for typical bond ETFs. But depending on how the interest-rate exposure is hedged, some costs might not be present in the expense ratio, Dave Nadig, chief investment officer at fund tracker ETF.com, tells The Journal.

"We're concerned that some of these negative-duration funds are highly complex and have characteristics that aren't easily discerned," says Antonio Caxide, chief investment officer at Hamilton Capital Management in Columbus, Ohio.

And many bond market participants expect yields to remain steady or fall in the short term after the Federal Reserve officials indicated in the minutes of their March meeting that they're in no hurry to raise interest rates.

"Expectations of Fed rate hikes were pushed further out in time, which has been supported by low inflation and mixed economic data," Christopher Sullivan, chief investment officer at United Nations Federal Credit Union, tells Bloomberg.

"All together, the backdrop has been constructive for U.S. debt."

Editor's Note: Secret Wall Street Calendar Uses Strange ‘Crash Alert System,’ Gets 18.79% Annual Returns

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You can now purchase exchange-traded funds (ETFs) designed to protect you from rising interest rates.
ETFs, rising, interest, rates
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2014-09-14
Monday, 14 April 2014 11:09 AM
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