HYHG: High-Yield Returns with Built-In Rate Protection in a Rising Rate Environment

In an era marked by persistent inflation and aggressive Federal Reserve rate hikes, investors seeking income generation face a paradox: high-yield bonds offer attractive coupons but are vulnerable to rising interest rates. The ProShares High Yield-Interest Rate Hedged ETF (HYHG) emerges as a compelling solution, blending the income potential of junk bonds with a sophisticated hedging strategy to neutralize duration risk. This article examines how HYHG’s unique structure enables strategic income generation while insulating portfolios from the volatility of rate-sensitive markets.

A Dual-Pronged Approach: High-Yield Exposure Meets Rate Hedging

HYHG’s architecture is designed to decouple high-yield returns from interest rate movements. The fund holds a diversified portfolio of high-yield corporate bonds, averaging a seven-year maturity, while simultaneously shorting U.S. Treasury futures to offset duration risk. Specifically, 22% of hedging is allocated to two-year futures, 32% to five-year, and 42% to 10-year, aligning the fund’s net effective duration to near zero [2]. This approach ensures that even as the Fed tightens monetary policy, HYHG remains insulated from the price declines typically associated with rising rates.

The fund’s hedging strategy is further reinforced by strict diversification rules: no single issuer exceeds 2% of the portfolio, and all bonds are from issues of at least $1 billion in size [2]. This reduces idiosyncratic risk while maintaining broad exposure to sectors like industrial services, manufacturing, and energy—industries historically resilient during economic transitions [2].

Performance in Action: Resilience During 2020–2025 Rate Hikes

HYHG’s effectiveness is evident in its performance during the 2020–2025 period of rising rates. As of July 31, 2025, the fund delivered an 8.22% year-to-date total return and a 7.43% annualized return over five years [1]. These figures outpace traditional high-yield benchmarks, which, despite strong fundamentals, face duration-related headwinds. For instance, HYHG’s maximum drawdown of -25.71% during the period was significantly lower than the -34.24% drawdown of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), underscoring the efficacy of its hedging mechanism [1].

The fund’s 0.50% expense ratio also positions it as a cost-effective alternative to traditional high-yield strategies, which often require active management to mitigate rate risk [2].

Strategic Advantages Over Traditional High-Yield Funds

Traditional high-yield funds, while offering yields of ~7.5% (compared to 5.33% for investment-grade bonds), remain exposed to duration risk [3]. HYHG’s zero-duration structure provides a distinct edge. For example, during the 2024 rate hike cycle, short-duration high-yield funds returned 0.7%, but HYHG’s hedging eliminated rate sensitivity entirely [1]. This allows investors to capture credit-driven returns without sacrificing capital preservation.

Moreover, HYHG’s performance aligns with the FTSE High Yield (Treasury Rate-Hedged) Index, which has demonstrated robust returns in rising rate environments. The index’s 8.54% annualized return over one year as of July 2025 highlights its ability to capitalize on tightening credit spreads while neutralizing rate risk [1].

Expert Validation: A Proven Strategy in Volatile Markets

Third-party analyses corroborate HYHG’s value proposition. ProShares’ research notes that HYHG’s index has outperformed typical duration high-yield and short-duration strategies during periods of rising rates [1]. Bloomberg data further validate this, showing the fund’s index had a duration of just 0.01 years as of December 31, 2024 [1].

Industry experts also highlight HYHG’s role in diversified portfolios. As global high-yield durations have contracted to ~3 years since 2020, HYHG’s zero-duration approach offers a unique hedge against rate volatility [2]. This is particularly relevant in 2025, where the Fed’s forward guidance suggests continued rate hikes, albeit at a slower pace.

Conclusion: A Strategic Tool for Income-Seeking Investors

HYHG represents a paradigm shift in high-yield investing, offering the income potential of junk bonds without the duration-related vulnerabilities. Its hedging strategy, validated by historical performance and expert analysis, makes it an ideal vehicle for investors navigating a rising rate environment. As central banks remain cautious about inflation, HYHG’s ability to isolate credit risk while neutralizing rate exposure positions it as a cornerstone of strategic income portfolios.

**Source:[1] HYHG | High Yield - Interest Rate Hedged ETF [https://www.proshares.com/our-etfs/strategic/hyhg][2] The Current Case for a Rate Hedged Bond Strategy [https://www.proshares.com/browse-all-insights/insights/case-for-rate-hedged-bond-strategy][3] High Yield Outlook: Elevated Yields Endure into 2025 [https://www.morganstanley.com/im/en-us/financial-advisor/insights/articles/elevated-yields-endure-into-2025.html]