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Time to Reconsider High Yield with This ETF

This article was originally published on ETFTrends.com.

With the Dow Jones Industrial Average heading for its fifth positive day in a row, investors could be less hesitant to dip back into high-yield bond exchange-traded funds (ETFs). So far, fund flows are showing that a risk-on sentiment is seeping back into the markets, which makes the case for investors to consider high-yield income ETFs from DWS Group.

In particular, one fund to consider is the Xtrackers High Beta High Yield Bond ETF (HYUP) , which seeks investment results that correspond generally to the performance, of the Solactive USD High Yield Corporates Total Market High Beta Index. The underlying index is designed to track the performance of the segment of the U.S. dollar denominated high yield corporate bond market that exhibits higher overall beta to the broader high yield corporate fixed income market.

A volatile end to 2018 no doubt elicited a risk-off sentiment that permeated throughout the capital markets, causing high-yield bond funds to experience an aggregate one-month outflow of $1.45 billion, according to data from XTF. However, investors could be turning a corner on high-yield to start 2019.

“The last two or three days have been very strong for the high-yield space,” said Jay Pestrichelli, co-founder and managing director of ZEGA Financial. “It’s not at all a clear signal by any means, but it certainly is -- I think -- a reduction in panic.”

When compared to other similar high yield ETFs, HYUP is tops in terms of pure yield.

"It could be an opportune time to enter HYUP in light of recent spread widening to attractive levels," said Luke Oliver, Head of U.S. ETF Capital Markets at DWS. "The risk-off sentiment in the HY market over 4Q18 has pushed spreads for US HY approximately 200bps wider. We believe this could present an attractive entry level into US HY."

Ticker Index Index Yield Duration Ratings Average  % BBB- to BB- % B+ to B- % Below B-
HYUP Solactive USD High Yield Corporates Total Market High Beta Index 8.59 4.21 B+ 27.20% 58.75% 14.05%
HYDW Solactive USD High Yield Corporates Total Market Low Beta Index 5.41 3.22 BB 78.57% 21.11% 0.32%
HYLB Solactive USD High Yield Corporates Total Market Index 7.12 3.76 BB- 50.88% 41.40% 7.72%
HYG Markit iBoxx USD Liquid High Yield Index 7.03 3.79 BB- 53.07% 40.18% 6.75%
JNK Bloomberg Barclays High Yield Very Liquid Index 7.66 4.65 B+ 41.52% 46.98% 11.50%


No Recession in Sight

As for concerns regarding a global economic slowdown, Oliver doesn't forecast a recession happening in the U.S. anytime soon, making high-yield opportunities a play worth considering. A confluence of a more dovish Fed, forthcoming earnings and stabilizing oil prices could foster an environment where high yield can thrive after investors were spooked the past few months.

"While we may be entering into the later stages of the credit cycle, we view the probability of a near-term recession as low, and, importantly, expect default rates could remain low," said Oliver. "Corporate earnings should remain sound despite the likelihood that corporate executives will lower full-year expectations during 4Q18 reporting later this month. We believe recent indications are that Fed rate moves will be more measured. Oil prices appear to be stabilizing. Additionally, technical factors should be supportive with portfolio managers reporting cash balances above historical levels, dealer balance sheets holding low inventory and projections for near-term issuance being modest."

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