Many investors like the higher yields and additional income associated with high-yield corporate bonds, but some do not like the increased volatility that comes with this corner of the bond market. The IQ S&P High Yield Low Volatility Bond ETF (NYSEARCA: HYLV) is an exchange traded fund offers them a potentially less volatile approach to junk-rated corporate debt.
Tumbling yields on safer government and corporate debt pushed investors towar riskier and higher yielding debt, like junk bonds. Furthermore, U.S. corporate bonds are enjoying a stronger tailwind in an environment of strong economic growth, healthy earnings and dropping default rates.
Adding to the allure of HYLV is the low volatility factor’s historical track record in both the equity and fixed income spaces. Assets deemed as low volatility usually offer better risk-adjusted returns over the long-term.
What Makes HYLV Unique
HYLV tracks the S&P U.S. High Yield Low Volatility Corporate Bond Index. That index “is designed to measure the performance of U.S. high yield corporate bonds with potentially low volatility. The index is comprised of bonds from the S&P U.S. High Yield Corporate Bond Index and is a modified market value weighted index with a 3% cap on any single issuer,” according to S&P Dow Jones.
The current environment could be more favorable for higher-rated junk bonds while riskier fare could languish. More highly leveraged or junkier debt securities could be negatively impacted by the tax reform changes while more highly rated speculative-grade securities could outperform.
HYLV is a “rules-based, fixed income ETF that seeks to provide lower volatility exposure to high yield bonds,” according to IndexIQ. The ETF “seeks to capture a large portion of the attractive yield offered by high yield bonds, while reducing the volatility with the riskiest credits.”
Related – Bond ETFs: Smooth Operators Amidst Volatility
High-yield bonds may also be less negatively impacted by a rising rate environment. Junk bonds often perform well in times of rising rates, as long as the rate increases are driven by improving economic activity as we are witnessing now. The stronger economic growth makes it easier for companies to earn a return on capital and to pay down debt.
HYLV’s underlying index features 420 bonds with an effective duration of 4.22 years. Duration measures a bond’s sensitivity to changes in interest rates. HYLV has a trailing 12-month yield of 3.94%, according to Morningstar data.
For more information on the speculative-grade debt market, visit our junk bonds category.