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ArrowFunds Proposes High Yield Bond ETF

Zacks Equity Research

A wide variety of products have been introduced into the ETF world so far this year by several providers, whether big or small. In line with this trend, ArrowFunds, the Maryland-based firm best known for mutual funds, looks to expand in the high yield bond ETF world as well.

Many investors continue to embrace high yield bond ETFs for their portfolio despite fears of a bond bubble and soaring equity prices thanks to their outsized yield and the historically low default levels (read: HYLD: Crushing the High Yield ETF Competition).

This is particularly true in the present scenario where traditional bonds like U.S. Treasury securities yields are near record lows. Further, high yield securities have lower correlation to the broad equity markets, making them ideal portfolio diversifiers.

In order to tap into this trend, ArrowFunds has introduced a filing on to the market for the Arrow Global Enhanced High Yield Bond ETF. The filing targets high yield securities in the global bond market, potentially giving investors another fixed income option for current income in today’s yield starved environment.

While a great deal of the key information – such as expense ratio or ticker symbol – was not available in the initial document, some key points were released in the filing. We have highlighted those below for yield-hungry investors, who may be looking for a high yield play from ArrowFunds should it pass regulatory hurdles:

Proposed Methodology

The proposed ETF looks to track the performance of the Global Enhanced HY Bond Issuers Index, before fees and expenses. The benchmark would focus on below investment grade corporate bonds throughout the world denominated in U.S. dollars, Euros, Canadian dollars or British pounds (read: Bet on the Euro with These 3 ETFs).

The fund will generally invest 80% of its assets in the components of the index and might invest the remaining 20% in securities not included in the index or other ETFs, derivatives (such as futures or swaps) and money market instruments.

How does it fit in a portfolio?

The product could be an interesting choice for investors seeking a broadly diversified play on the bond market, which zeros in on high yielding securities (read: 3 Red Hot Dividend ETFs).

In the current environment, yield hungry investors view high yield bonds as good sources to maximize current income in the form of interest, especially compared to other avenues which have low yields attached to them. Further, given low default rates and low duration compared to the other corners of the fixed income market, this hefty yield premium could be worth chasing for most investors.

Competition in the Global High Yield Corporate Bond Market

The main competitor to the proposed ETF looks to be the iShares Global High Yield Corporate Bond Fund (GHYG). This product isn’t very old, having debuted about a year ago, although it does see small daily volume of about 13,000 shares and a solid $959.3 million in AUM.

Investors should note that though this product focuses on below investment grade corporate bonds denominated in U.S. dollars, Euros, Canadian dollars or British pounds, it tracks the Markit iBoxx Global Developed Markets High Yield Index. The ETF holds about 500 securities and charges 40 bps in fees a year from investors (see more in the Zacks ETF Center).

Although GHYG hasn’t exactly added a great deal of assets since its launch on the market, there is definitely promise in the fund. The new product from ArrowShares could see increased interest from investors seeking a diversified way to obtain yield in the bond market given rock-bottom interest rates (read: Junk Bond ETF Investing: Is It Too Late?).

Further, the proposed fund is the second offering from ArrowShares in the ETF space. The first product - Arrow Dow Jones Global Yield ETF (GYLD) - garnered a decent amount of investor interest with assets of more than $79 million since its debut one year ago, so a new fund targeting big payouts could also be a winner for this upstart firm.

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