From the May 2013 issue of Research Magazine • Subscribe!

Hedging Rate Spikes

Van Eck Global introduced a new corporate bond ETF that hedges against rising interest rates.

The Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEARCA:THHY) aims to combine the income potential of high-yield corporate bonds while simultaneously shorting Treasury notes.

“With THHY, investors have the ability to better position their bond portfolios now for a rising interest rate environment, but they can do so while still earning income on the fund and even have upside potential during a low interest rate environment, said Fran Rodilosso, fixed income portfolio manager with Market Vectors. “I believe it is not a question of if, but rather when, we will begin to see rising interest rates.”

THHY is linked to the Market Vectors U.S. Treasury-Hedged High Yield Bond Index. It contains below-investment grade corporate bonds, denominated in U.S. dollars, and, through the use of 5-year U.S. Treasury notes, a hedge against the price sensitivity to interest rate fluctuations of the bonds included in the index. The fund and its underlying index do not currently use any swaps or derivatives.

Market Vectors points out that an investment of this kind carries risks associated with high-yield securities, such as sensitivity to adverse economic changes or individual issuer developments, as well as liquidity concerns, credit risk, interest rate risk and risks associated with hedging.

THHY has a net expense ratio of 1.45% with the fund’s expenses capped at 0.50% until September 1, 2014. Cap excludes certain expenses, such as interest.

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