High Yield ETFs in Spotlight as Treasury Yields Rise
This article was originally published on ETFTrends.com.
The ascent of benchmark Treasury yields has sparked an interest in high-yield debt issues as investors may be realizing that the extended bull run in U.S. equities may be losing steam and with a risk-on appetite still prevalent, the hunger for returns can now be satiated in high-yielding bonds.
"Investors pulled money from high yield bond ETFs in the first quarter, but demand has been building since then, and to start the fourth quarter it has accelerated," noted Todd Rosenbluth, director of ETF and mutual fund research at CFRA, in an article.
Rosenbluth cited heightened activity in ETFs like the iShares iBoxx $ High Yield Corp Bd ETF (HYG) that tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality. HYS seeks to provide total returns that closely correspond to the ICE BofAML 0-5 Year US High Yield Constrained Index, which is comprised of U.S. dollar denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market with remaining maturities of less than 5 years.
"For HYG, the 8.2 million shares traded on October 1 was 1.4 times its average daily volume," said Rosenbluth. "To CFRA this gives us confidence that liquidity remains strong and should support further investor interest."
Last week, the capital markets received a bevy of job data from the Labor Department that alluded to a strong labor market. This was paired with the surge in benchmark Treasury yields, but according to Robeco fund manager Jeroen Blokland, the strong economic data paired with a rise in yields is par for course in normalizing monetary policy.
However, the velocity at which yields rise should be of concern other than just the fact alone that yields are rising.
“Fast rising rates brings corporate debt sustainability into play,” said Blokland. “So if rates keep rising like this I expect volatility in equity markets, but as long as they don’t ramp up to let’s say 4% or so, I think this should be seen as positive. Also the yield curve is steepening, reducing recession odds."
Other High-Yielding ETF Options
Fixed-income investors can also explore other high-yield options, such as the ProShares High Yield—Interest Rate Hdgd (HYHG) and WisdomTree Interest Rt Hdg Hi Yld Bd ETF (HYZD).
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in U.S. Treasury securities. The majority of the fund's total assets will be invested in the component securities of the index and investments that have economic characteristics that are similar in nature.
For more trends in fixed income, visit the Fixed Income Channel.
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