Some newer names (including some in registration but not yet in the market) will strive for similar low volatility/defensive HY exposure that is a byproduct of a higher-quality skew in exposure (or said otherwise eliminating lower-rated bonds/issuers that cause a large proportion of the volatility in the broad high yield market). Some do this via a factor-based approach, while some do this via an exclusionary process (i.e. eliminated lower rated or lower quality bonds/issuers). As the smart-beta trend continues to bleed over from equities to fixed income, I would expect the number of these alternative weighted ETFs to increase.
Global
An alternative way to diversify U.S. high yield exposure is to go international. The first point of diversification is the differences in fundamentals between U.S. and non-U.S. high yield issuers. At rough glance, the international high yield marketplace has a higher quality skew, as measured by both its rating profile (higher BB weighting / lower CCC weighting) and its lower spread as compared to broad U.S. high yield. But as is the case with international equities, an investor also should take currency risk into consideration. Currency fluctuations can add an additional layer of volatility, but conversely can also enhance the diversification benefits. For investors who wish to avoid this currency effect, there are currency-hedged ETFs available, as well as forthcoming dollar-denominated-only ETFs (so including non-U.S. companies who have issued USD-denominated bonds).
Active/Other
Taking a cue from the primarily active high yield market in the mutual fund world, there are a few different active strategies available in the high yield ETF world. The largest of these names is HYLS, which takes a long/short investment approach. The fund can use the short side of the equation in treasuries (as a duration offset/hedge) and/or shorting corporate bonds (as a risk offset/hedge). Given the success of active high yield names in the mutual fund world, I could see this also being an area where future ETF growth could occur.
Summary
While broad-high yield can be a perfectly appropriate choice for many investors based on its characteristics, there is a differentiated subset of other high yield exposure in the market for investors who are looking for a bit more nuanced exposure.
Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.
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