The Low-Vol Concept Applied to High-Yield Bond ETFs

The low-volatility factor has been a popular way for investors to achieve improved risk-adjusted returns in the equities market, and IndexIQ recently applied the concept to a newly launched high-yield bond exchange traded fund.

ETF Trends publisher Tom Lydon spoke with Salvatore Bruno, Executive VP and Chief Investment officer of IndexIQ, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about their newly launched IQ S&P High Yield Low Volatility Bond ETF (NYSEArca: HYLV).

“It is unique and different in the high-yield space,” Bruno said. “We’re taking the low-volatility concept that’s been applied successfully and documented by the academic research on the equity side for a number of years, so we’re taking that and applying it to a very liquid universe of high-yield corporate bonds.”

The high yield low volatility bond ETF tries to reflect the performance of the S&P U.S. High Yield Low Volatility Corporate Bond Index, which is comprised of U.S. dollar-denominated high-yield corporate bonds that have been selected using a rules-based methodology that identifies securities expected to have a lower volatility relative to the broader high-yield market.

“We use the concept that we developed called the marginal contribution to risk,” Bruno said. “What that does is it looks at the duration of each bond as well as the spread of each bond, and using those metrics we try to filter out the 50 percent most risky bonds in the universe so that you have the lowest risk high-yielding bonds in the universe.”