Some exchange traded funds, including the WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (BATS: WFHY), provide fundamental approaches to high-yield corporate bonds, a strategy that could prove useful in a challenging interest rate environment.
WFHY and its short-term counterpart, the WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (BATS: SFHY), WFHY and SFHY seek to provide investors with the potential to capture the performance of selected issuers in the U.S. high yield corporate bond market—they each have a net expense ratio of 0.38%.
While the number of domestic corporate defaults this year is relatively low, WFHY’s fundamentally-weighted methodology could serve income investors well if defaults increase.
“In 2018, of the 19 companies (issuers) that have defaulted, the market cap weighted index held 16 of them accounting for 31 bonds (issues) in total. These companies make up approximately 1.19% of the overall investable universe. This compares to a single issue and a single issuer in our fundamentally based approach constituting only 0.21% of the index,” according to WisdomTree.
More ‘WFHY’ ETF Perks
About 65% of WFHY’s holdings are rated BBB or BB, indicating that credit risk in the fund is not excessive. WFHY has a 30-day SEC yield of 5.34% and an effective duration of 4.07 years. Duration measures a bond’s sensitivity to changes in interest rates.
Importantly, WFHY’s index methodology has helped that benchmark avoid half the corporate defaults seen in the U.S. this year.
“The WisdomTree Index uses a combination of factors to identify bonds with favorable risk/reward in high yield. Step one of the process is to exclude issuers that do not have publicly traded equities and thus may not report public financials. In our view, these companies are under less scrutiny to manage a healthy balance sheet. This approach has helped our Index avoid nine defaults so far this year,” according to WisdomTree.
WFHY is outperforming the largest junk bond ETF by 160 basis points this year.
For more information on the bond market, please visit our Fixed Income Channel.