If one is concerned about the direction of interest rates, there are ways to limit duration exposure to near zero with an interest-rate hedged high-yield ETF to participate in the corporate bond market while still limiting rate risk and BDCs that have exposure to floating rate loans.
The VanEck Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY) is an interest rate-hedged or zero duration ETF that holds long-term speculative-grade bonds but also simultaneously shorts Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise. Consequently, this hedged high yield bond ETF could outperform non-hedged high yield bonds if interest rates continue to rise.
The VanEck Vectors BDC Income ETF (NYSEArca: BIZD) can also act as a high-yield alternative with low rate risk. BDCs act as an alternative to bank loan debt, helping smaller companies grow and profiting off the investments, which in turn would then help investors gain exposure to the growth and income potential of these privately held companies. Moreover, BDCs should also do relatively well in the kind of environment ahead where many expect an increase in interest rates. Since BDC loans are mostly floating rate – over 70% on average, the companies could earn more as rates rise.
Additionally, investors can look to international exposure as many global assets come with higher yields compared to their U.S. counterparts, including non-U.S. bonds, hard and local-currency denominated bonds, and corporate and sovereign bonds.
Investors who are interested in high-yield international bond options can also look at the VanEck Vectors International High Yield Bond ETF (NYSEArca: IHY), which tracks the BofA Merrill Lynch Global ex-US Issuers High Yield Constrained Index, an index of below investment grade corporate bonds issued by non-U.S. corporations in the major domestic or Eurobond markets. Investors who are allocated to only U.S. high-yield corporate bonds may be missing a significant portion of the global corporate high-yield market as international high yield corporate bonds have historically outperformed U.S. high yield corporate bonds, Rodilosso said.
Lastly, the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM) holds a number of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that are rated below investment grade, offering investors attractive yields. On the other hand, the VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) tracks local currency-denominated emerging market bonds.
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