Fixed Income Investors Can Dial Up the Yield With This ETF

A recent Fed pause on interest rates could put pressure on lower yields. However, fixed income investors can dial up the yield with active exchange traded funds (ETFs) like the American Century Select High Yield (AHYB).

The ability to obtain yield doesn’t have to come at the expense of taking on a heavy dose of credit risk. Per its product website, AHYB can help mitigate credit risk “by emphasizing bonds with the highest ratings within the high-yield category (those rated BB and B).”

Given this focus, the 30-day unsubsidized SEC yield (as of May 31) is at 7.46%. The 12-month distribution rate comes in at 5.18% with both yield figures integrating a strategy that handpicks holdings that exhibit low volatility and a low risk of default.

“This approach offers the potential for lower volatility and default risk coupled with more attractive risk-adjusted returns than traditional high yield,” the site added.

AHYB is in ideal option in the current market environment where the bond market is rallying after a 2022 bearish run. High yield is also attracting more attention as a risk-on sentiment starts to gain momentum.

“For many advisors and investors, high yield bonds ETFs are a means of risk-taking within the fixed income asset class,” wrote Todd Rosenbluth, head of research at VettaFi. “When they are feeling more confident in the economy, investors look to learn about high yield ETFs.”

An Active Option in Pursuit of Yield

AHYB has an expense ratio of 0.45%. The active management component allows the fund managers to remain pliable in a market environment that can change rapidly, especially with the Fed still trying to tame inflation.

According to the fund’s product website, the managers apply a research-intensive process that seeks to identify companies that they believe can:

  • Carry debt loads across market cycles
  • Generate sustainable cash flows
  • Decrease leverage on their balance sheets in pursuit of higher ratings

In order to crack into its diverse array of holdings (474 as of April 30), the fund utilizes a top-down macro overlay that establishes duration and ratings distribution. Then, sector allocations are determined through a bottom-up security selection.

46% of the fund ranges between five and 10 years in order to enhance yield opportunities. At the same time, however, another 48% of the fund incorporates debt with maturities ranging from one and five years, keeping things on the shorter end of the duration spectrum to minimize rate risk.

For more news, information, and analysis, visit the Core Strategies Channel.