By Ashley Lau
NEW YORK, Sept 24 Exchange-traded fund companies
are coming to market with a rash of new products and strategies
designed to protect income investors from the dangers of rising
Even though the Federal Reserve deferred the start of a
rising rate era when it held policy steady last week, "the
narrative still holds," said Matt Tucker, head of fixed income
strategy at BlackRock's iShares.
Investors still expect interest rates to rise when the
central bank starts to reduce its bond-buying in the months to
come, Tucker said.
When interest rates rise, bonds and bond funds tend to lose
value, a fact that has caused investors to pull out of many
traditional bond funds this year.
From the beginning of June, when Fed-tightening rumors
started to circulate, investors have withdrawn $123.4 billion
from bond funds through Friday, September 20, according to data
from research provider TrimTabs. Outflows of $68.6 billion in
June were the biggest for any month on TrimTabs' records.
To keep those investors happy and keep their assets,
BlackRock and others are unveiling and promoting exchange-traded
funds (ETFs) that focus on bonds but rely on protective
strategies like interest rate hedging and defined-maturity
Guggenheim Investments on Tuesday introduced two new High
Yield Corporate Bond ETFs to its BulletShares lineup of
fixed-maturity ETFs. BlackRock's iShares launched its first
corporate bond defined-maturity ETF suite in April, and added
another four defined-maturity ETFs in July.
BlackRock, the largest ETF provider, also has plans to
launch a new iShares fund focused on short maturity bonds,
according to a company filing with the Securities and Exchange
Commission. The ETF is set to trade under the ticker "NEAR" on
the BATS Exchange when it launches, according to the filing.
The introduction of new products comes on the back of what
ETF providers say is an increasing investor appetite for such
funds. Year to date, investors have put $31.6 billion into
short-term exchange-traded bond funds as they are less volatile
when rates rise than long-term bond funds, according to
In addition, investors have been putting money into
exchange-traded products like BlackRock's iShares Floating Rate
Bond ETF, which aims to reduce interest rate risk by
focusing on bonds whose coupon payments change based on
prevailing short-term interest rates. It has had roughly $2.9
billion in net inflows since January, according to data from
Rising rates cause falling bond prices, and the longer the
maturity of the bond, the sharper the fall. For every 1 percent
increase in interest rates, the price of a 10-year Treasury bond
can be expected to decline roughly 8.7 percent. Holders of
individual bonds can avoid selling at a loss by simply holding
the bonds to maturity, when they can cash in their bonds for
their full initial value.
Bond fund investors have no fixed maturity date to target.
Their fund portfolios buy and sell bonds but investors never
know when their stake will return to its initial value.
They can lose money in ETFs, too, of course. ETFs, which are
traded all day on stock exchanges, can see more volatility than
traditional mutual funds (which only price once a day, after the
markets close.) And ETFs track indexes, so a straight bond ETF
can be as risky as a traditional bond mutual fund when rates
ETF producers are finding ways, however, to create and track
indexes that employ more complicated strategies than traditional
bond funds do.
For example, Guggenheim Investments is positioning its
BulletShares ETFs as ideally situated for a rising rate
environment. The BulletShares funds are bond funds which each
aim at a different maturity date. For example, the Guggenheim
BulletShares 2015 High Yield Corporate ETF, focuses on
investment-grade corporate bonds that mature in 2015.
Guggenheim has 10 traditional corporate bond BulletShares
ETFs and eight high yield corporate bond BulletShares ETFs,
including the two new ETFs that began trading on Tuesday.
Investors can buy several of these BulletShares and know
that the principal they have invested in each one will be there
in full when the fund matures. In that way they can set up their
own "laddered" portfolios - with some money coming due every
year and some money earning the higher yields that longer-term
bonds and funds command.
The 2015 fund has won $218 million in net inflows so far
this year, according to IndexUniverse data.
Guggenheim, which launched its first corporate bond
BulletShares ETF in 2010, had record sales For its BulletShares
suite in July, according to Bill Belden, head of product
development and managing director, who expects inflows to
continue apace as investors seek to protect against rising
Other ETF providers have introduced products that use
hedging strategies to limit rising rate risks. Van Eck launched
its Market Vector Treasury-Hedged High Yield Bond ETF in late
March. The ETF provides exposure to high yield corporate bonds
and takes short positions in Treasury notes to hedge against
rising interest rates.
At ProShares, which launched a similar High Yield - Interest
Rate Hedged ETF in May, "We had a lot of our adviser
and client community come and ask what they could do to protect
their bond portfolios in a rising rate environment," said
Stephen Sachs, head of capital markets at ProShares.
ETF providers say they also expect this year's significant
inflows into short-term bond ETFs to continue. Those funds, like
Vanguard Short-Term Corporate Bond Index, PIMCO's 0-5
Year High Yield Corporate Bond ETF, the iShares 1-3 Year
Credit Bond ETF and the SPDR Barclays Short Term High
Yield Bond ETF, are less responsive to interest rate
hikes than long-term funds.