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High-Yield Bond ETFs That Limit Losses

NEW YORK ( TheStreet ) -- At a time when most bond funds have been sinking, high-yield exchange-traded funds have suffered especially big losses.

During the past month, SPDR Barclays High Yield Bond (JNK) lost 5.7% while iShares iBoxx $ High Yield Corporate Bond (HYG) declined 5.5%, according to Morningstar.

But new hedged ETFs have been limiting the damage by selling some assets short, betting that bonds will fall.

Among the top performers is ProShares High Yield-Interest Rate Hedged (HYHG), which returned 0% in the past month.

Other hedged funds that have outdone conventional high-yield ETFs include Market Vectors Treasury-Hedged High Yield Bond (THHY) and First Trust High Yield Long/Short (HYLS - Get Report).

High-yield funds, which hold bonds that are rated below-investment grade -- have suffered from an unusual one-two punch.

First, interest rates have climbed. Since the beginning of May, the yield on 10-year Treasuries rose from 1.66% to 2.58%. When rates rise, bond prices tend to fall as investors sell existing securities with low yields.

Second, investors have become nervous about risky investments of all kinds. As a result they have been dumping high-yield bonds. Since the beginning of April, investors have pulled $2.1 billion out of the SPDR high-yield fund alone, according to IndexUniverse.com.

To protect shareholders against difficult markets, the ProShares hedged fund starts by buying about 130 high-yield bonds, assembling a portfolio that tracks a Citigroup benchmark. Then the portfolio managers short Treasury bonds by selling futures. Whenever Treasury prices fall, the value of the futures increases. Gains from the futures lately have boosted the fund.

Instead of buying the ProShares fund, investors could achieve similar results by buying a high-yield ETF and combining it with a fund that shorts Treasuries. But that would require constant monitoring to make sure that one of the two funds did not surge and become overweighted in the portfolio.

ProShares makes matters easier because the fund constantly rebalances its portfolio so that the allocations to Treasury futures and high-yield bonds remain steady.

If rates continue to rise during the next year, as many economists expect, then the hedged funds should outdo the conventional high-yield ETFs. But if rates stay flat or decline, then the ProShares hedged fund is likely to trail.

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SYM TRADE IT LAST %CHG
THHY $24.19 -0.10%
HYG $90.91 0.14%
JNK $39.42 0.10%
HYHG $73.76 -0.77%
HYLS $50.73 -0.14%

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