ProShares Proposes Hedged High Yield Bond ETF

ProShares is probably best known for its extensive lineup of leveraged and inverse ETFs as these funds comprise the bulk of the company’s offering to investors. However, the firm does have a few other products outside of the levered space including several hedged strategy products and a few fixed income options as well.

It appears as though ProShares is looking to expand this corner of its ETF lineup with a proposed hedged High Yield Bond ETF. In a recent SEC filing, the company revealed plans for this new ETF, although it should be noted that not all details made available in the initial filing (read iShares Launches Multi-Asset, Global Junk Bond ETFs).

For example, investors are still in the dark on key factors like the expense ratio or ticker symbol, but there were still some important details released nonetheless. Below, we have briefly discussed some of these key points made available in this initial filing for those who are looking for a new way to play the junk bond market with potentially lower levels of risk:

The fund looks to track an index of U.S. dollar denominated high yield corporate bonds, giving investors a potential income destination in today’s low rate environment. Yet instead of just investing in these securities, the ETF will also look to mitigate the impact of interest rate changes on the fund by going short in U.S. Treasury bonds.

With this approach, some worries over a ‘bond bubble’ bursting should be offset, helping to ease the minds of investors who want the yield of junk bonds, but without the some of the heavy risks that go along with them. After all, during the crisis of 2008, junk bond spreads over T-bills skyrocketed, leaving investors high and dry, suggesting that for those who want a lower risk approach, this could one day be an option.

Obviously, the usage of short securities will probably increase the total cost of this ETF while it will also drag on overall yield when compared to unhedged counterparts. But for those who are worried about a sharp reversal in rates, this could be a tradeoff worth making in the long run (read HYEM: The Best Choice in Junk Bond ETFs?).

ETF Lineup

The fund should also help ProShares to round out its ETF lineup a little more, expanding its ‘hedge strategies’ section into the fixed income market. Currently, the company has three other hedge products although these use hedge replication, 130/30, and RAFI techniques, thus shying away from the bond market (see Three Hedge Fund ETFs for Uncorrelated Returns).

While the company does have more than a dozen geared fixed income products, this will mark the first such fund that doesn’t employ leverage for its exposure. This could make it an intriguing option for those seeking a new way to target fixed income that is sort of a ‘middle road’ between geared and -1x approaches.

ETF Competition

While there aren’t any pure competitors right now, investors should note that this filing came just days after Van Eck revealed plans for a similar ETF that targets hedged high yield securities. It too looks to take out some interest rate risk by shorting Treasury bonds while at the same time maintaining a long holding in junk bonds (read Van Eck Files for Hedged Junk Bond ETF).

There wasn’t a great deal of details released about this product either, so we can only speculate as to how these two might be similar or different if they ever launch. One thing is for certain though, issuers are clearly looking at new ways to tap into fixed income securities and a ‘hedged’ technique could be an increasingly popular approach.

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