Deutsche Asset & Wealth Management (Deutsche AWM) has expanded its US exchange-traded fund platform with the launch of three new interest rate-hedged fixed income ETFs.
Deutsche AWM has unveiled three fixed income ETFs designed to mitigate the effect of rising US Treasury interest rates.
The ETFs, which have been listed on the NYSE Arca, provide investors with exposure to various US dollar-denominated bond segments, whilst mitigating the effect of rising interest rates.
Based on proprietary Deutsche Bank indices, they include the Deutsche X-trackers Investment Grade Bond – Interest Rate Hedged ETF (IGIH), linked to the DBIQ Investment Grade Corporate Bond – Interest Rate Hedged Index tracking investment grade corporate bonds; the Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF (HYIH), linked to the DBIQ High Yield Corporate Bond – Interest Rate Hedged Index tracking high-yield corporate debt; and the Deutsche X-trackers Emerging Markets Bond – Interest Rate Hedged ETF (EMIH), linked to the DBIQ Emerging Markets Bond – Interest Rate Hedged Index tracking emerging markets sovereign and quasi-sovereign debt.
Each of the underlying indices is composed of long positions in their target USD-denominated fixed income segment (i.e. investment grade bonds, high-yield corporate bonds and emerging markets bonds) and short positions in US Treasury bonds of, in aggregate, approximate equivalent duration to their target fixed income segment. Duration is a measure of the sensitivity of a bond’s price relative to interest rate changes. By taking these short positions, the underlying indices seek to mitigate the potential negative impact of rising Treasury interest rates on the performance of the target bond segment. The short positions are not intended to mitigate other factors influencing the price of the target bonds, such as credit risk, which may have a greater impact than rising or falling interest rates.
Commenting on the new listings, Fiona Bassett, Head of Deutsche AWM’s Passive Business in the Americas, said: “Deutsche Asset & Wealth Management continues to bring to market innovative indexing products and strategies that anticipate investors’ portfolio needs. We designed IGIH, HYIH and EMIH as tools for managing duration, a source of both risk and potential return that can be dialed up and down using this new product suite. This feature may be particularly appealing as investors seek to mitigate solutions for reducing the interest rate sensitivity of their bond portfolios in anticipation of rising rates.”
Dodd Kittsley, Head of ETF Strategy at Deutsche AWM, added: “We believe a particularly compelling approach in today’s environment is to hedge interest rate risk using ETFs. Traditional strategies for addressing interest rate risk include shortening duration or shifting into different asset classes, which lower exposure to interest rate risk but also reduce exposure to the risk and compensation of credit. Interest rate hedged ETFs allow investors to seek to mitigate the impact of rising rates while preserving desired bond exposures. On a standalone basis or in conjunction with other fixed income holdings, these ETFs could prove a powerful tool for risk management.”
Deutsche AWM’s Passive business in the Americas has enjoyed significant success over the past year or so. With assets totalling $7.8 billion as of February 20th 2015, an 82% increase since year end, Deutsche X-trackers is one of the fastest growing ETF franchises in the US. Globally, the firm has grown to become the world’s fifth largest provider of exchange-traded funds, with approximately USD 56.8 billion in assets under management as of December 31, 2014.