3 High Yield Bond ETFs to Watch on Fed Tapering

The fixed income world remained depressed this year with global sell-off over the past couple of months. Investors have been continuously shifting their exposure to the equity world based on improving U.S. economic conditions, Euro zone’s escape from recession and stabilizing Chinese economy (read: Bond ETFs Experience Massive Outflows).

Further, the chance of Fed curtailing its monetary easing policies anytime soon is rising. A pullback in such stimulus should raise the interest rates from their rock-bottom levels, thereby hurting the bonds prices.

Yields on 10-year Treasury bonds soared to nearly 3% earlier this month from a low of around 1.6% in May. In such a backdrop, yield-hungry investors could view high-yield bonds as good sources to maximize current income in the form of interest, especially compared to other choices that have low yields attached to them (read: Forget BOND, Focus on These Junk Bond ETFs Instead).

Additionally, since these bonds are less sensitive to interest rate fluctuations, these provide a cushion to investors against the rising interest rates environment. Further, yields in this sector offer a significant yield premium over the more highly rated Treasury bonds.

Hence, investors seeking to play on the fixed income space may find it difficult to ignore this opportunity to tap meaty dividends. For these investors, we have highlighted three bond ETFs that could continue to offer higher yields even if the Fed tapers and equities continue to rise.

These funds could provide investors with income potential and relatively stable returns while maintaining low correlated assets, and thus could be high quality picks, at least in the short term (see: all the High Yield Bond ETFs here):

Peritus High Yield ETF (HYLD)

This fund is actively managed and seeks to provide capital appreciation in addition to high yields. It offers the best value and least credit risk to investors in the high yield space by investing in corporates with a lower effective duration of roughly 3.52 years. In terms of credit quality, HYLD focuses on low-investment grade bonds (B+ and lower) and holds about 69 securities.

The product is extremely spread out across each sector and security, as no single bond or sector accounts for more than 1.77% and 13% of assets, respectively. The ETF has amassed $325.4 million in its asset base so far and trades in moderate volume (read: HYLD: Crushing the High Yield ETF Competition).

Though HYLD is a bit pricey charging 1.35% in expenses, it has proven itself a winner compared to other bond choices, gaining 7.23% year-to-date. Further, the ETF pays out a high annual dividend yield of about 7.97% per annum while the 30-day SEC yield is greater at 8.31%.

iShares B-Ca Rated Corporate Bond Fund (QLTC)

This product follows the Barclays U.S. Corporate B - Ca Capped Index, holding 212 securities in the basket. It targets the medium term corporate bonds with average maturity of 4.93 years and effective duration of 3.98 years.

With AUM of $10.2 million, the product puts more focus on the industrial sector with 87% share but does not invest more than 1.84% in single bonds. The fund charges 55 bps in fees per year while volume is light. The ETF sports attractive yield of 7.12% annually, and it has a 30-day SEC yield of 6.11%. Further, the fund added 1.16% this year.

Market Vectors Fallen Angel ETF (ANGL)

This innovative fund uses sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index and focuses on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from grace and are now trading as junk bonds.

This unique approach gives the portfolio 82 securities that are widely spread across them with financial as a top sector. The fund has a modified duration of 5.28 years and year to maturity of 9.57 years. Additionally, the product mainly comprises BB and B rated corporates, which together make up for 85% of the asset base.

The ETF trades in paltry volumes and charges a relatively low fee of 40 bps per year from investors. It has accumulated just $15.70 million in AUM and added 1.35% so far this year. It yields 6.28% per annum, while it has a 30-day SEC yield of 5.24% (read: QE Tapering Could Make These Bond ETFs Winners).

Bottom Line

Investing in high yield bond ETFs is a risky choice due to its higher default rates when compared to the safe haven Treasury counterparts amid huge market volatility and tension in the Middle East. As such, we currently have a negative long term view on all the three products as HYLD and QLTC have a Zacks Rank of 5 or ‘Strong Sell’ rating and ANGL has a Rank of 4 or ‘Sell’ rating (see more in the Zacks ETF Center).

However, the appeal for these funds would probably increase in the coming months should the Fed taper and interest rates rise. Further, more investors would flock into these funds as higher yields help to compensate for the added risks as the global economy, including China and Europe, is showing improvement. This suggests that if current trends hold, the ETFs outlined above might be decent short term choices for those seeking high yield plays in this environment.

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