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Direxion’s New Bearish Junk Bond ETF to Hedge Market Risks

editor@etftrends.com (ETF Trends)

With mounting uncertainty over speculative-grade debt markets, Direxion Investments has expanded its line of inverse and leveraged exchange traded funds to include a high-yield, junk bond option.

The recently launched Direxion Daily High Yield Bear 2X Shares (HYDD) tries to reflect the daily performance of -2x or -200% performance of the Barclays U.S. High Yield Very Liquid Index. HYDD comes with a 0.80% expense ratio.

“While high yield bonds have been embraced by those looking for yield and higher returns, traders and investors are now preparing for potential pullbacks due to the uncertain U.S. interest rate climate and the corresponding impact on high yield markets,” Sylvia Jablonski, Managing Director at Direxion, said in a statement. “But, it can be expensive to change the asset and security allocation of portfolios. Our High Yield Bear Leveraged Fund is a simple and cost-effective hedge for tactical managers who want to capitalize on these changing markets.”

Related: Wall Street Eyes Junk Bond ETF for Easy Liquidity

Along with interest rate risks, the high-yield bond market also faces rising credit risks as the volume of U.S. companies defaulting on their riskiest debt is rising into the second half of 2016, with depressed metals and crude oil prices weighing on producers.

According to Fitch Ratings, the trailing 12-month U.S. high-yield bond default rate rose to 4.7% in mid June, compared to 3.8% at the end of April, and is closing in on the 6% rate anticipated by year end, reports Rachel Koning Beals for MarketWatch.

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“We’re not quite at the midway point of the year, and the default volume has accelerated, evidenced by the nearly $28 billion recorded in April and May,” Eric Rosenthal, senior director of leveraged finance at Fitch Ratings, told MarketWatch. “Even though many of the large players in commodity price-dependent sectors have already succumbed to default, there are still a few big ones that could shake up the rate later this year.”

Fitch has warned that the large majority of defaults will come from the energy and metals/mining sectors, or a little over 4% of the anticipated 6% default rate.

More aggressive bond traders seeking to hedge against these risks or capitalize off short-term moves can utilize HYDD to trade a turn in the junk bond market.

Related: iShares Rolls Out Fallen Angel, Ex-Energy Bond ETFs

HYDD’s underlying index sector allocations include telecom 21.3%, non-cyclical consumer 17.6%, energy 13.8%, cyclical consumer 13.8%, financial 8.7%, industrials 7.7%, basic materials 6.7%, tech 6.0% and utilities 3.2%.

HYDD will be competing with the ProShares Short High Yield ETF (SJB) , which takes the inverse -1x or -100% daily performance of the Markit iBoxx $ Liquid High Yield Index.

For more information on new fund products, visit our new ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.