New High-Yield Bond ETFs Reach for Yield
Interest rates are close to all-time lows, which means that the prices are high. Prices can certainly stay high for a long time, but buying high is obviously a risky proposition.
Many investors believe that they need to enter different or traditionally higher-yielding segments of the bond market in order to get a reasonable yield. In an effort to accommodate that sentiment, the exchange-traded products industry has come out with many funds targeting these high-yield segments of the bond market.
For example, Van Eck recently launched the Market Vectors Fallen Angel High Yield Bond Fund (ANGL).The investment universe for this fund is bonds that were rated investment grade when they were issued but that have since been cut to less-than-investment-grade ratings. Not surprisingly, the fund is heavy in bonds issued by financial companies. These make up 32% of the portfolio, with bonds from issuers such as Ally Financial, Royal Bank of Scotland (RBS) and Capital One Financial (COF). Not surprisingly, there are also bonds from struggling companies in other sectors such as Sprint (S), Pulte Group (PHM) and even Toys R Us. > > Bull or Bear? Vote in Our Poll According to the fund's fact sheet, the modified duration is five years with an average yield to worst of 7.48%. Of course, yield information for ETFs can always change, and the fund has an expense ratio of 0.40%. Another example of a new high-yield bond segment is the iShares Emerging Markets High Yield Bond Fund (EMHY). This fund has similar duration and yield statistics as ANGL but charges a 0.65% expense ratio because trading emerging-market high-yield debt is more expensive than trading domestic debt even if the bonds in EMHY are dollar-denominated. The largest country weightings in EMHY are Venezuela at 14%, and Turkey and the Philippines at 13% each. Lebanon and Nigeria each get 4% weightings in the fund, so this is legitimately new exposure for retail investors. Broadly speaking, one of the benchmark funds for the high-yield space is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which has been trading for five years and has $14 billion in assets under management.
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