This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

High-Yield Bond ETFs That Limit Losses

When rates fall, bond prices tend to rise. That would hurt the value of the short positions held by the hedged fund. In a period of flat rates, the short positions would not provide any capital gains or losses. But selling short imposes costs because of brokerage commissions and other expenses. Those costs, which can range from less than 0.10% to 1%, are subtracted from total returns.

Although the ProShares and Market Vectors funds track benchmarks and always sell short, First Trust High Yield Long/Short has some room to maneuver because it is actively managed. First Trust portfolio manager William Housey currently has 25% of his assets in short Treasury positions. But if conditions warrant, he is free to reduce the short positions or remove them altogether.

Housey favors companies with relatively steady cash flows. Worried about erratic markets, he has been underweighting the lowest-quality bonds, which are rated CCC. "We have ended up with a little higher credit quality than you see in some of the passive funds," he says.

Worried that rates will continue rising, Housey has put 15% of his portfolio in floating-rate senior loans. The loans are made to companies that are rated below-investment grade. When rates climb, the interest payments on the loans adjust upwards. Because of their adjustable rates, the loans have proved resilient this year. "The loans have been the best-performing fixed-income class lately," says Housey.

Although Housey has been shorting Treasury bonds, he has not been shorting high-yield bonds. He says that he only shorts high-yield bonds during periods when defaults are rising. At the moment, default rates are low, and corporate balance sheets are solid. "Cash flows are relatively steady, and businesses are performing quite well," he says.

At the time of publication, Luxenberg had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
HYHG $74.20 0.10%
HYG $90.82 0.22%
THHY $24.21 0.08%
JNK $39.42 0.25%
HYLS $50.77 0.49%

Markets

DOW 18,162.99 +121.45 0.67%
S&P 500 2,123.48 +19.28 0.92%
NASDAQ 5,106.5930 +73.8420 1.47%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs