Van Eck, a US-based sponsor of exchange-traded funds (ETFs), has unveiled the Market Vectors Treasury-Hedged High Yield Bond ETF (THHY). The fund combines the income potential of high-yield corporate bonds with the interest rate-hedging capability offered by shorting Treasury notes.

Fran Rodilosso, Portfolio Manager, Market Vectors.

The launch of the fund follows the introduction of the Market Vectors US Treasury-Hedged High Yield Bond Index, the fund’s benchmark, in February this year.

The fund is designed to provide long exposure to below-investment grade corporate bonds, denominated in US dollars, and, through the use of five-year US Treasury notes, to hedge against the price sensitivity to interest rate fluctuations of the bonds included in the index.

Qualifying corporate bonds must have a below-investment grade rating (based on an average ratings of Moody’s, S&P and/or Fitch) and at least one year remaining to final maturity, a fixed coupon schedule, and a minimum amount outstanding of $500 million.

The short positions are composed of current five-year US Treasury notes in the equivalent dollar amount of the long high-yield positions at every rebalance date. The fund and its underlying index do not currently use any swaps or derivatives.

Fran Rodilosso, Fixed Income Portfolio Manager with Market Vectors, said: “I believe it is not a question of if, but rather when, we will begin to see rising interest rates. Predicting when rates will ascend again is obviously the hard part. 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.”

The fund has been listed on the NYSE Arca and has a net expense ratio of 1.45%, with the fund’s expenses capped at 0.50% until September 1, 2014.

UK and European investors looking for a similar product could consider the iShares Barclays Capital Euro Corporate Bond Interest Rate Hedged ETF (IRCP). This London Stock Exchange and Deutsche Börse-listed fund enables investors to access euro-denominated corporate bonds whilst mitigating interest rate risk. The fund, which has accumulated more than €186 million in assets since its launch late last year, protects against a potential upward shift in German yields, the benchmark eurozone market interest rate, by shorting bund futures.