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]