Sophisticated investors looking for a new way to access the high-yield credit market have a pair of new options in the form of the ProShares CDS North American HY Credit ETF (BATS: TYTE) and the ProShares CDS Short North American HY Credit ETF (BATS: WYDE).
The widely anticipated ETFs, the first backed by credit default swaps (CDS), debuted Thursday. Credit default swaps are used by traders to protect against issuer default. CDS buyers pay sellers until the contract’s maturity date. Buyers can be seen as speculating the issuer will in fact default.
“TYTE and WYDE have a variety of uses in sophisticated portfolios,” said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, in a statement. “For instance, WYDE can be used to hedge against the credit risk in high yield bonds. With TYTE, investors can obtain exposure to the high yield bond market without the risk associated with rising interest rates.”
TYTE provides long exposure to the credit high-yield issuers based in North America. “To accomplish its objective, this actively managed ETF invests primarily in centrally cleared, index-based credit default swaps and cash equivalents. Swaps are chosen for their ability to maintain broadly diversified exposure to their credit segment, offer greater relative liquidity, and provide greater sensitivity to changes in credit quality,” according to ProShares.
WYDE provides short exposure to the credit of North American issuers. Both new ETFs are actively managed and charge 0.5% per year. TYTE and WYDE’s reference index is the Markit CDX North American High Yield Index.
“Markit CDS indices roll semi-annually, in March and September. Credit events that trigger settlement for individual components are bankruptcy and failure to pay, and credit events are settled via auctions,” according to the data provider.
CDS are often viewed as complex, opaque products by retail investors and many of those investors have a negative image of CDS following the global financial crisis. That does not mean these ETFs will not be successful. In fact, these funds could be the beneficiaries of good timing. If interest rates spike, lowly-rated borrowers that issued high-yield bonds at today’s low rates could be forced to pay old debt with new debt issued at higher rates, a scenario that could increase the allure of CDS. [Love for CDS ETFs]