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This Interest Rate-Hedged High Yield ETF Is Suddenly Making Big Inroads

Monday, November 21, 2016 11:49
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The behemoth iShares iBoxx $ High Yid Corp Bond ETF (NYSE:HYG) has some competition these days from an unexpected place: a tiny sister product that’s hedged against rising interest rates.

Flying completely under the radar is HYGH, which just last week saw a huge infusion of institutional money. From Bloomberg:

The iShares Interest Rate Hedged High Yield Bond ETF (NYSE:HYGH) attracted nearly $35 million in inflows on Friday, its largest day on record, in what looked to be a small number of large block trades.

Source: Bloomberg

This could mark the early innings of a new trend in the bond markets, where investors pile into rate-hedged funds as they did years ago into currency-hedged products. With interest rate hike fears on the rise — and Treasuries already suffering massive losses after Trump’s surprise win earlier this month — the move is understandable.

“Investors just got finished using currency-hedged ETFs like central bank surfboards to ride waves of liquidity, now the tide is beginning to turn and you can see them starting to use interest-rate rate hedged ETFs as life rafts to deal with rising yields and expected rate hikes,” said Eric Balchunas, ETF analyst at Bloomberg Intelligence. “HYGH is basically HYG but with zero duration — a sequel product essentially designed to attract investors who want HYG’s exposure but without the rate risk.”

HYGH shares rose $0.38 (+0.43%) to $87.84 in afternoon trading Monday. Year-to-date, the fund has gained 5.77%.

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