Hedge Rising Yields With These Junk Bonds ETFs
The path of junk bond ETFs has been patchy for the last couple of months. The space put up a dull show in 2014. The acute plunge in oil prices in the second half of the last year weighed heavily on the space, especially on the energy bonds. This was because the U.S. energy companies spread their presence widely to the high-yield bond market to materialize the shale-oil boom. Thus, fears of their default amid the oil price massacre prompted junk bond sell-offs. Since things have not meaningfully improved on the oil price front especially with the signing of the Iran nuclear deal and sluggish global demand backdrop, junk bonds started taking cues from the Fed interest rate policy. The Fed emphasized the strong U.S. growth momentum in the second half of 2015 that alternatively means the start of policy tightening sometime later this year. The exit from the rock-bottom interest rate policy would raise yields on the treasury notes, thereby hurting the bonds’ prices. In such a scenario, junk bond ETFs could emerge as intriguing options as these are high-yield in nature. Demand for strong and steady current income will likely prevail in the coming months. Investors’ drive for higher yield has become so obvious in the zero-or-negative-yield scenario in the Euro zone and Japan that the global high-yield space has gained immense traction lately, even at the cost of higher risks. Meanwhile, Grexit worries that brewed for over a month frittered away lately with the approval of a new bailout program. Chinese stocks have also stabilized after a wild rout. All these whet investors’ risk-on sentiments to some extent. As a result, the ultra-popular iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) enjoyed ‘their largest daily inflows’ in the week ended July 17, 2015. On July 15, JNK and HYG witnessed 4% and 2.23% rise in AUM topping the fixed income list, per etf.com . In such a backdrop, junk bond ETFs with outsized yield mentioned below may weather the rising rate risks to a large extent. These funds could provide investors with a strong income potential and relatively stable returns while maintaining low correlated assets, and thus could be in focus for high-yield seekers: Interest Rate Hedged High Yield Bond ETF (NYSEARCA: HYGH ) Along with high yield, this fund hedges rise in rates and thus serves as an option to play rising yield in the U.S. The fund holds in its basket iShares iBoxx $ High Yield Corporate Bond ETF while taking short positions in U.S. Treasury futures to diminish rising rate concerns. HYGH has a weighted average maturity of 4.60 years while its effective duration stays ultra-low at negative 0.32 years. HYGH is high yield in nature as evident from its 30-day SEC yield of 5.68%. HYGH charges 0.55% of expense ratio. The fund added about 1.8% in the last five trading sessions (as of July 16, 2015) and is up 0.8% year to date. ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG ) This fund also behaves in the same fashion as that of HYGH while tackling rising rate worries. Its strategy is to take a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 5.6% in 30-Day SEC terms, indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. This $105.8 million ETF was up 1.8% in the last five trading sessions (as of July 16, 2015). High Yield Long/Short ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities. Though capital appreciation is its secondary motive, it has added a bit this year, gaining 4.5% YTD. The product thrives on long-short strategies. Net weighted average effective duration (considering the short positions) is 2.91 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.18 years of weighted average maturity. The product is expensive with an expense ratio of 1.29% per annum. Volume is light, trading in less than 35,000 shares per day that ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 6.40% (as of July 16, 2015). iShares Global High Yield Corporate Bond Fund (BATS: GHYG ) This fund tracks the Markit iBoxx Global Developed Markets High Yield Index. The index captures the performance of the global high yield corporate bond market. The fund’s effective duration stands at 4.09 years suggesting moderate interest rate risk. It charges an expense ratio of 40 bps and yields around 4.90%. The fund has added about 1.1% so far this year and was up over 1.9% in the last five trading sessions. Original Post