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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

Investing Beyond The Borders

By Charissa Cashin, Director Fund Product Management and Development – Principal Funds After World War II, the U.S. became the world’s undisputed economic leader. American investors looking for a wide range of opportunities needed to look no further than their own back yards. Investing outside the U.S. was seen as unnecessarily risky. But today, even with the Greece-triggered euro commotion and the China stock market turmoil, those who think international investing is too risky should keep the following in mind. In China, India, and Brazil alone, the growing middle classes have propelled these economies to the size of the industrialized “G7” countries. By 2050, these countries are predicted to make up nearly half of world output, far exceeding the G7. While America undoubtedly still has a wealth of innovative companies and market leaders, opportunities abroad are increasingly plentiful. And although international investing may not be for everyone and certainly involves some risk, ignoring the opportunities beyond our borders means passing up on the potential for additional growth. Markets outside the U.S. may offer some of the best investing opportunities available right now. Technology companies in Asia are great examples. Everyone thinks of Apple (NASDAQ: AAPL ) when they think of tech stocks, but what they don’t always realize is that a lot of its components are made overseas. Those manufacturers are making a lot of money, but they’re not as overexposed as Apple – which creates a buying opportunity. There are also good prospects for under-appreciated growth in Europe, which has a lot of global, export-oriented companies. And with the strengthening of the dollar, there may be more purchasing power for these products outside of Europe. Emerging markets may be another area of opportunity. After sub-par performance over the last few years, some of these markets may offer outstanding values. Active managers keep an eye open for values like these that can lean to uncommon buying opportunities. International investing is an important way to build diversification in your portfolio. That’s because international equities don’t always move in the same way as domestic equities. When international equities are up, for instance, domestic equities may be down – and vice versa. This kind of potential for low correlation can help reduce a portfolio’s overall volatility. Add to that the potential for growth available internationally, and you have some very good reasons for considering investments beyond the U.S. borders.

Vanguard Extended Market Index ETF Analysis

We love the Vanguard S&P 500 ETF (NYSEARCA: VOO ). We have had this index in our portfolios for decades. The Vanguard Extended Market Index ETF (NYSEARCA: VXF ) is the mate to the Vanguard S&P 500 Index. They are a pair, and we recommend taking them together. The Vanguard Extended Markets ETF follows the S&P Completion Index. To understand this index you must first understand the S&P Total Market Index. This is a comprehensive US market index that includes large, mid, small and micro cap stocks. Take the S&P 500 stocks out of the S&P Total Market Index and you end up with the S&P Completion Index. This is why they are a pair that should not be separated. The S&P Completion Index holds all of the other mid, small and micro cap stocks not included in the S&P 500 Index. Our database of 1,500+ ETFs does not show any ETFs that replicate the S&P Total Market Index. Even if there were a great ETF available, we would still buy the Vanguard S&P 500 ETF combined with the Vanguard Extended Markets ETF. These two ETFs move at different rates, and since we apply Opportunistic Rebalancing to our portfolios, we have found rebalancing benefits from buying these two ETFs. The Vanguard Extended Market ETF has a low internal fee of 0.14 percent. Even better, as discussed in the previous spotlight, the actual total holding costs have been lower at 0.11 percent over the past 12 months. Put these costs into perspective. The average mutual funds charge 1.27 percent and the average ETF charges 0.61 percent. Vanguard is able to achieve the lowest total costs in the business because they are formed like a credit union instead of a bank. Vanguard is owned by the funds themselves and, as a result, is owned by investors in the funds. This is why Vanguard rebates all of the income from lending securities while most companies rebate a much smaller share. There’s a reason turtle doves come in pairs in “The Twelve Days of Christmas.” Much like the turtle dove, if you are going to use the Vanguard S&P 500 ETF, then consider combining this great holding with the Vanguard Extended Market ETF. Share this article with a colleague