Surprisingly sturdy fundamentals, among other factors, have high-yield bonds on a roll this year, depressing yields in the process.
Factor-based exchange traded funds like the Invesco High Yield Bond Factor ETF (IHYF) can help investors stay on the right side of income and quality in the junk bond space while simultaneously capitalizing on credit opportunities.
Actively managed, IHYF “utilizes a factor-based strategy that seeks to outperform the Fund’s market-weighted benchmark index by systematically targeting securities in the benchmark index exhibiting quantifiable issuer characteristics that the investment team believes will have higher returns than other fixed income securities with comparable characteristics over market cycles,” according to Invesco.
That methodology could prove alluring for investors at a time when yields on some widely followed junk bond benchmarks hover around record lows.
Interested in the IHYF ETF?
“While the prospect of the poorest-rated companies being able to pay less than 4% to issue debt might raise the specter of a bubble in the making, most bond pros don’t see any major problems brewing, at least not yet,” reports Jeff Cox for CNBC.
Default rates were low in the first half of 2021, a trend ratings agencies expect will continue throughout the year. Yet even if defaults climb, IHYF could prove durable by way of a mere 3% allocation to CCC-rated bonds. Conversely, 69% of the funds 302 holdings are rated BBB or BB, the higher ends of junk territory.
Regarding interest rate risk, it’s mostly limited in IHYF as over 59% of its holdings have short-term maturities and maturities up to five year. The ETF’s effective duration is 3.97 years. The active management inherent to the fund can react more nimbly in changing junk bond climates than a rival passive fund can.
Fortunately for investors, the issue of credit risk is likely subdued for the near- to medium-term because companies are sitting on ample cash piles.
“Companies have built huge cash positions over the past several years, with total liquid assets at nonfinancial companies totaling $6.4 trillion through the first quarter of 2021, according to the Federal Reserve. That’s up nearly 50% just since 2018,” according to CNBC.
About 31.5% of IHYF’s holdings are courtesy of consumer cyclical and energy issuers. Another 24% are from either the communication services or industrial sectors.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.