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]