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Hedged And Inverse Bond ETFs To The Rescue If Rates Rise

The behavior of the fixed income market is different this week from the last. This is because a few hawkish comments from some Fed officials completely ruled out the dovish mood felt last week after the Fed announced no rate hike in its latest meeting and cut the number of projected rate hikes for this year (read: Buy Ranked Dividend Growth ETFs in Focus after Fed Meeting ). In any case, the recent data points corroborated sturdy U.S. economic growth. Plus, comments from Atlanta Fed president Dennis Lockhart, San Francisco Fed president John Williams and Richmond Fed president Jeffrey Lacker once again stirred up the rate hike talks, going by Reuters . As per these officials, the reduced rate hike projection mainly reflected the tantrums thrown by the global financial market, which are now showing signs of cooling off. The two important indicators to measure the timing of another rate hike – labor market and inflation – are both stabilizing. San Francisco Fed president even said that he would promote a hike as early as April. Against this backdrop, speculation of a sooner-than-expected hike in the Fed interest rates is rife again. As a result, U.S. treasury yields recorded the biggest single-day rise in over a week on March 21, 2016. On March 21, yields on 10-year Treasury notes jumped 4 bps to 1.92% while yields on two-year Treasury notes rose 3 bps to 0.87%. Investors should note that fixed-income investing has enjoyed a great show so far in 2016, especially in the longer part of the yield curve, as risk-off trade sentiments have brightened the appeal for safer assets. However, the prospect of rising rates and risks to capital gains of the bond holdings have left investors jittery about the safety of their portfolio. Given the situation, many investors may pull their money out of the bond market. At a time like this, investments in U.S. bonds with significant protection from potential rising rates can be good bets. Some opportunistic investors could capitalize on this backdrop in the form of inverse ETFs too. Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA: THHY ) The fund seeks to replicate the price and yield performance of the Market Vectors U.S. Treasury-Hedged High Yield Bond Index. THHY has a weighted average maturity of 9.83 years while its effective duration is at negative 0.50 years. The product is high yield in nature as evident from its 30-day SEC yield of 6.04% (as of March 21, 2016). THHY charges 0.50% of expense ratio. The fund added about 5.5% in the last one month (as of March 21, 2016) (see all the junk bond ETFs here ). ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG ) HYHG is another ETF which has an interest rate hedge built into its strategy as it takes a duration-matched short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 8.77% in 30 Day SEC terms (as of February 29, 2016), indicating that this could be a safer bond and yield play for investors anxious about rising rates. This $85.1 million ETF was up 8.1% in the last one-month frame (as of March 21, 2016). ProShares Investment Grade-Interest Rate Hedged ETF (BATS: IGHG ) This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index which comprises long positions in USD-denominated investment grade corporate bonds issued by both U.S. & foreign domiciled companies while adopting short positions in US Treasury notes or bonds of approximate equivalent duration to the investment grade bonds. The index seeks to achieve an overall effective duration of zero. Its 30-Day SEC yield stands at 3.93% (as of February 29, 2016) while it charges 30 bps in annual fees. The $135.4-million fund was up 4.4% in the last one month (as of March 21, 2016). Barclays Inverse US Treasury Aggregate ETN (NASDAQ: TAPR ) The note provides investors a unique strategy to hedge against or benefit from the rising U.S. dollar interest rates by tracking the Barclays Inverse US Treasury Futures Aggregate Index. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. If the price of each Treasury futures contract increases or decreases by 1% of its face value, the value of index would decrease or increase by 5% over the same period. The $15.5-million fund charges 43 bps in annual fees. It added about 4.4% in the last one month (as of March 21, 2016). Link to the original post on Zacks.com

Norway ETFs In Focus Post Rate Cut

In its latest meeting, Norway’s central bank lowered its key interest rate to an all-time low of 0.5% from 0.75%. This move was highly anticipated given a history of rate cuts and weak outlook. The outlook for Western Europe’s biggest crude producer, Norway, has gone from bad to worse in the last couple of months, thanks to persistently low oil prices. Norway is among the top 10 nations famous for oil exports and, with its comparatively low population, oil forms a key part of the country’s GDP. The central bank stated that the developments in the Norwegian economy have been weaker than expected, with unemployment expected to go northward from the current level of 4.5%. Negative Interest Rate on Radar The Norwegian central bank also hinted at further rate cuts and warned that it could even go to negative territory in order to revive the economy. Meanwhile, several other countries are also following a strategy of monetary easing, which generally comes in the form of an interest rate cut to boost growth. Earlier this month, the European Central Bank (ECB) came up with a more intensified economic stimulus and opted for multiple rate cuts and the expansion of its quantitative easing program to boost the economy. Apart from ECB, Norway’s neighbors Sweden and Denmark have also adopted this policy. Another European country – Switzerland – has lowest rates across the world and held the rates steady in March. Meanwhile, the Fed has also maintained its dovish stance. The central bank now expects the federal funds rate to rise to 0.875% by the end of the year, as compared with the previously expected 1.375%, implying only two rate hikes as compared to the previously expected four rate hikes. Although rate cuts are expected to boost economic activity, the Norwegian central bank noted that rock-bottom rates could hamper the profitability of commercial systems and affect the financial system adversely. A Closer Look at 2 Norwegian ETFs In the light of these developments, we highlight two ETFs – the Global X MSCI Norway ETF (NYSEARCA: NORW ) and the iShares MSCI Norway Capped Investable Market Index ETF (BATS: ENOR ) – that have gained 0.5% and 0.9%, respectively, in the last 5 days. Both have a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. NORW This is the most popular ETF tracking the Norwegian market with AUM of $59.4 million and average daily volume of almost 62,000 shares. The fund tracks the FTSE Norway 30 Index, holding 57 securities in its basket while charging 50 bps in annual fees from investors. The product is somewhat concentrated in both sectors and securities. The top three firms account for almost one third of total assets, while from a sector point of view energy dominates the fund’s assets with 30% share. The fund has a tilt toward large-cap stocks at 61%. ENOR This ETF follows the MSCI Norway IMI 25/50 Index, holding a basket of about 55 companies that are based or do most of their business in Norway. The product puts about 67.7% of total assets in the top 10 holdings, suggesting concentration. Although a capping methodology is applied, limiting the weight of any single stock to a maximum of 25% of total assets. Large caps are pretty prevalent, as these make up 61% of assets. With respect to sector holdings, energy again takes the largest share at 29.6%, followed by financials (20.1%) and consumer staples (15.3%). The product has amassed $17.9 million in its asset base while it trades in volumes of around 23,000 shares. It charges 53 bps in fees per year from investors. Original Post