Fixed-income investors who are worried about the rising rate environment ahead may consider a low-volatility, high-yield bond ETF strategy that helps limit downside risk and cushion potential pullbacks with its higher payouts.
“Low volatility funds – which capture most of the upside with lower downside risk. Reinvesting interest income – which in a period of declining prices is put back to work at higher yields – is always a good strategy. Spreads bear watching, too, since it’s where any emerging credit concerns are likely to be seen first. The bottom line is that while high yield is a long way from the double-digit yields of the past, it continues to offer an income opportunity for those who are comfortable taking some risk,” Salvatore J. Bruno, Chief Investment Officer and Managing Director for IndexIQ, said in a note.
Financial advisors can also learn more about IndexIQ’s insights at the upcoming virtual conference. On March 14, 2018, ETF Trends will be hosting its annual Virtual Summit, an online virtual conference environment where financial advisors can learn about current ETF issues, hear from industry experts and connect with peers without the burden of cost and traveling.
High-yield bonds may also be less negatively impacted by a rising rate environment. Junk bonds often perform well in times of rising rates, as long as the rate increases are driven by improving economic activity as we are witnessing now. The stronger economic growth makes it easier for companies to earn a return on capital and to pay down debt.
Nevertheless, high yield will likely experience greater volatility going forward. While there’s a new sheriff in town, the Federal Reserve’s policy approach set by Janet Yellen is expected to remain unchanged, with more planned rate hikes and the continued unwinding of the Fed’s balance sheet ahead.
Consequently, ETF investors may limit volatility and still generate attractive yields through a targeted ETF strategy. The IQ S&P High Yield Low Volatility Bond ETF (NYSEARCA: HYLV) is is a rules-based, fixed income ETF that seeks to provide lower volatility exposure to high yield bonds. 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. HYLV should offer better downside protection and improved risk-adjusted performance than market-cap-weighted index alternatives over the long term.
For more information on the speculative-grade debt market, visit our junk bonds category.