Looking to add a high yield bond ETF to your portfolio? You wouldn’t be alone. High yield ETFs overall are doing pretty well this year, returning 5% YTD per YCharts as of October 11th. That’s better than short-term and ultra-short bond categories. In a year that has seen fixed income return to playing an important role in portfolios, it makes sense that investors would be looking for high yield bond strategies.
High yield bonds have outperformed nearly every other bond category YTD per YCharts, yes, but why look to high yield otherwise? There are a few intriguing reasons. For one, many investors likely already have set their allocations to other parts of the fixed income space and are now looking for the right strategy in a riskier area.
Investing in a high yield bond ETF could also appeal, given the headwinds facing equities. Should the stock market start to slow down, adding some potential yield opportunities to a portfolio while rotating into more defensive equities could improve a portfolio overall.
Still, investors should be cautious about investing in high yield, given that it entails investing in so-called “junk bonds.” High yield strategies offer significant upside potential, especially when they come with experienced, active management. While a passive strategy that simply tracks an index of high yield bonds might miss key pieces of information, an active strategy like the Fidelity High Yield Factor ETF (FDHY) brings significant scrutiny to each opportunity.
Understanding High Yield Bond ETF FDHY
FDHY, which recently hit its five-year ETF milestone, invests in U.S. dollar-denominated, below-investment-grade corporate debt issued in the U.S. market. The high yield bond ETF currently holds $281.5 million in AUM per VettaFi data and has outperformed U.S. investment grade bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, by more than 8% over the last year per YCharts.
FDHY seeks to exploit inefficiencies in the high yield bond market by using a multifactor quantitative model to screen for bonds with high return potential and low probability of default. In addition, the ETF’s actively managed structure provides flexibility to invest in new issues, substitute bonds within the same issuer, and avoid illiquid names and unnecessary turnover, which may help minimize performance drag caused by high transaction costs. Charging 45 basis points (bps), FDHY may be one to watch for those considering making a new high yield allocation.
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