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FA Center: These bond funds thrive even when interest rates go up

CHAPEL HILL, N.C. (MarketWatch) — Has a fear of higher interest rates kept you away from intermediate and long-term bonds?

Of course it has. Who hasn’t acted out of such a fear?

Yet it’s a mistake to think that the only rational response to the prospect of higher rates is to reduce your exposure to longer-maturity bonds. There are now nearly a dozen exchange-traded funds that in effect allow you to invest in such bonds without incurring any interest-rate risk.

Sounds too good to be true, doesn’t it?

But consider interest-rate-hedged bond ETFs. They invest in a particular sector of the bond market and then, by shorting Treasury futures, reduce the effective duration of the fund down to zero — which means that, at least theoretically, the fund’s value won’t fluctuate regardless of whether interest rates rise or fall.

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