A New High-Yield Bond ETF That Limits Volatility

IndexIQ has launched a high-yield bond exchange traded fund that also focuses on securities exhibiting with lower volatility in an attempt to diminish some of the inherent risks found in speculative-grade debt while still allowing investors to generate attractive yields.

IndexIQ recently rolled out the IQ S&P High Yield Low Volatility Bond ETF (NYSEArca: HYLV). HYLV has a 0.40% total expense ratio.

HYLV is a “Rules-based, fixed income ETF that seeks to provide lower volatility exposure to high yield bonds,” according to IndexIQ. The ETF “seeks to capture a large portion of the attractive yield offered by high yield bonds, while reducing the volatility with the riskiest credits.”

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.

“HYLV is the outcome of a collaboration between IndexIQ; the Strategic Asset Allocation and Solutions division of New York Life Investment Management; MacKay Shields, a leader in fixed income investing; and Standard and Poor’s, one of the world’s most respected index providers,” Jae Yoon, Senior Managing Director and Chief Investment Officer, New York Life Investment Management, said in a note. “Together we’re giving investors and advisors tools that will help them add income generation potential to their portfolios in what is still a historically low rate environment, while addressing the concerns about volatility that often accompany high yield exposures.”

Specifically, each bond is ranked according to its marginal contribution to risk, or MCR, a measurement of the amount of risk a security contributes to a portfolio of securities. The measure is calculated using a bond’s duration and the difference between the bond’s spread and a weighted average spread of the bonds in the broader index universe. Those with a higher MCR will ad more credit risk than debt with a lower MCR. The underlying index will only select the 50% of bonds measured to have the least credit risk based on their MCR.

Due to its indexing methodology, the high-yield low-vol bond ETF ends up with a portfolio that more accurately measures credit risk relative to ratings issued by credit ratings agencies, which can be delayed, and is comprised of lower risk, higher rated, more liquid high yield bonds.

HYLV’s sector exposures include consumer discretionary 22.0%, financials 13.0%, telecom services 12.4%, energy 11.5%, materials 8.8%, health care 8.6%, industrials 8.5%, information technology 8.0%, consumer staples 2.9%, real estate 2.1% and utilities 2.1%.

Credit quality exposure includes speculative-grade BB+ 25.4%, BB 37.1%, BB- 20.1%, B+ 7.6%, B 6.8% and B- 3.0%.

The fund shows a 4.32 year effective duration, and fixed-income investors will will like to know that the ETF provides yield distributions on a monthly basis.

For more information on new fund products, visit our new ETFs category.

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