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ProShares, a US-based provider of alternative exchange-traded funds, has announced the launch of ProShares Investment Grade – Interest Rate Hedged ETF (IGHG), the first investment-grade bond ETF in the United States that provides a built-in hedge against rising interest rates.
Listed on the US-based BATS Exchange, the new ETF targets a duration of zero by shorting Treasury futures. Duration is a measure of interest rate sensitivity.
Michael Sapir, Chairman and CEO of ProShare Advisors, said: “Investors have been fleeing long-term bond funds as concerns grow over losses that might result from rising interest rates. While many investors have moved to shorter duration bond funds to lessen the impact of rising rates, they remain exposed to some interest rate risk.”
He added: “We are pleased to offer the first US ETF to provide investors a portfolio of investment-grade bonds with a built-in interest rate hedge designed to target a duration of zero.”
The fund is linked to the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index, a US 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 US Treasury bonds.
Each issuer is limited to 3% of the market value of the investment-grade corporate position of the index. The short position in US Treasury securities is constructed using three US Treasury securities corresponding to the 10-Year US Treasury Note Futures, US Treasury Bond Futures and Ultra US Treasury Bond Futures contracts in an attempt to approximate the maturity distribution of the overall index.
The short position in US Treasury securities attempts to hedge the duration and yield curve exposure of the long position in the investment-grade bonds in the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index. This strategy seeks to mitigate the negative impact of rising US Treasury interest rates on the performance of investment-grade bonds. Conversely, the strategy may limit the positive impact of falling interest rates.
Jayni Kosoff, Managing Director of Citi Fixed Income Indices, said: “Citi is pleased to be partnering with ProShares in the development of a series of indices for their suite of alternative ETFs. We designed objective, transparent, rules-based indices that not only reflect ProShares’ insightful investment strategies, but also, importantly, investor sentiment. Investors benefit when index innovation brings these elements together.”
The fund, which has an expense ratio of 0.30%, compliments ProShares’ existing interest rate hedged bond ETF, the ProShares High Yield – Interest Rate Hedged (HYHG), which launched earlier this year. This fund also targets a duration of zero but instead invests in a diversified portfolio of high-yield bonds.