This article was originally published on ETFTrends.com.
With the extended bull market in full swing, the risk-on mentality of investors have led them to gravitate towards high-yield debt assets, but with the Federal Reserve interest rate decision looming next week, has high-yield become somewhat of a safe haven? As the curtain closes on the bull run and the late market cycle, the natural propensity for fixed-income investors is to shift back to safer government debt, but in today's environment of rising rates, high-yielding bond strategies may be the safer option.
According to Sean Hanlon, Chairman, CEO and Chief Investment Officer of Hanlon Investment Management, these high-yielding bonds could be the best defense against more rate hikes to come despite most having below-investment grade debt issues.
"High yield bonds, being below investment grade, tend to be more sensitive to the economic environment, like stocks, than they are to interest rates," said Hanlon, in an article. "The high yield bond market, oddly, has been a bit of a haven this year. Traditionally not seen as such, high yield bonds have provided some insulation from rising interest rates and the strong dollar that are affecting the fixed income market this year."
Hanlon also cited that tax cuts have allowed high-yield debt to flourish as corporate earnings have been elevated. In addition, the steady rate of interest rate hikes has allowed high yield issuers to defer the brunt of the borrowing costs.
ETF Options for High-Yield
Fixed-income ETFs can offer investors with high-yield exposure, such as the iShares iBoxx $ High Yield Corp Bd ETF (HYG) , iShares 0-5 Year High Yield Corp Bd ETF (SHYG) and SPDR Blmbg BarclaysST HY Bd ETF (SJNK). With the aforementioned available in an ETF wrapper, it gives investors exposure to high-yield assets without the additional credit risk of direct exposure to the bonds themselves.
HYG 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. Investors who have been able to forego the credit risk have seen total returns of 5.49% the last three years and 1.96% the past year based on Yahoo! Finance performance figures.
SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade. Nonetheless, SHYG has managed to return 2.97% year-to-date, 3.75% the past year and 5.62% the last three years.
SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade. SJNK has returned 3.12% year-to-date, 4.09% the past year and 5.53% the last three years.
"Even though 2018 has been challenging for fixed income investors, I continue to see potential opportunities in high yield bonds to help generate returns for investors," Hanlon noted.
For more trends in fixed income, visit the Fixed Income Channel.
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