When searching for a high-yield bond option, investors can choose from a growing pool of exchange traded fund strategies to generate income.
Matthew Tuttle, chief executive of Tuttle Tactical Management, argues that junk bond ETFs are more attractive than they were at the end of last year after the price decline, reports Gregory Zuckerman for the Wall Street Journal.
However, analysts urge investors to remain cautious. For instance, Gershon Distenfeld, director of high yield at AllianceBernstein Holding, points out that the speculative-grade bond market includes a 15% exposure to energy companies, which have been pressured by falling oil prices. Meanwhile, Tuttle warned that higher interest rates ahead could dampen junk bond returns, even though a stronger economy helps issuers repay debts.
Consequently, investors who are wary about interest rate risks can also utilize the new breed of hedged bond ETFs. For instance, the WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEArca: HYZD), ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) and Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY) all hold high-yield junk bonds but also hedge the position by shorting Treasury bonds to create portfolios with a near zero duration – duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a zero duration effectively nullifies a bond fund’s sensitivity to rising interest rates. However, these types of zero-duration, hedged bond ETFs may underperform a non-hedged version if rates continue to decline. HYZD has a 4.46% 30-day SEC yield, HYHG has a 5.9% 30-day SEC yield and THHY has a 4.45% 30-day SEC yield. [Building The Case for Hedging Interest Rate Risk: The Power of Zero Duration]
J.J. Feldman, a portfolio manager at Miracle Mile Advisors LLC, also suggests the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) as an alternative. ANGL tracks former investment-grade global issuers that have been downgraded into junk status. The group sometimes have greater financing flexibility than companies that sell junk bonds. ANGL shows a 4.7% 30-day SEC yield.
Additionally, for a dividend option, investors can consider business development company-related ETFs. BDCs have generated high yields for investors as the are required to pay out at least 90% of interest income recieved in cash dividends. For instance, the Market Vectors BDC Income ETF (NYSEArca: BIZD) has a 8.18% 12-month yield and the exchange traded note UBS E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS) has a 8.02% 12-month yield. Moreover, Feldman points out that BDCs make loans with floating rates, so the sector provides some protection against a rising rate environment. Interest rates also typically rise during an improving economy, which would also support BDCs. [BDC ETFs Could See Increased Acivity As Goldman Enters Space]
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG and JNK.