Shorting Treasuries Helps Active High-Yield ETF

September 12th at 10:25am by John Spence

A high-yield ETF that’s actively managed has been aided by a short position in U.S. Treasuries as interest rates tick higher.

First Trust Tactical High Yield ETF (NYSEArca: HYLS) has been outperforming index-based junk debt ETFs since the fund launched in February of this year.

HYLS has a roughly 25% short position in U.S. Treasuries, according to manager First Trust.

The fund’s primary investment objective is to provide current income. The fund’s secondary investment objective is to provide capital appreciation. HYLS typically invests at least 80% of its assets in debt securities rated below investment grade.

The ETF is up 3.4% for the trailing six months. It was previously known as First Trust High Yield Long/Short ETF. [First Trust Launches Active High-Yield ETF]

The ETF can use leverage since its long positions may total up to 130% of net assets. The fund’s short positions will range between 0% and 30%. This long/short strategy is designed to capitalize on investment opportunities through various market cycles, according to First Trust. The management team uses fundamental analysis when picking high-yield debt securities.

“It’s important to look at the business and make sure it can pay its debts,” said William Housey, one of HYLS’s portfolio managers, in a telephone interview. “In below-investment-grade bonds, there is not a lot of upside but a lot of potential downside. Most of the returns come from income, so investors can suffer big losses in a bankruptcy.”

He described the ETF’s strategy as risk-management for the high-yield sector with a tactical short component. The fund is free to take short positions in U.S. Treasuries and corporate debt obligations, investment grade or high-yield.

Housey said HYLS started shorting 5-10 year Treasuries in February. The management team saw rate risk as more important than credit risk in the high-yield market. The ETF has also blended in some floating-rate senior loans to shorten duration.

Some high-yield bond ETFs that can take short positions in Treasuries include ProShares High Yield-Interest Rate Hedged (BATS: HYHG) and Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY). [High-Yield ETFs with Built-In Rate Hedges]

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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