After months of outflows from high yield fixed income ETFs, there is a “feeding frenzy,” according to Eric Balchunas, senior ETF analyst at Bloomberg. The latest consumer price index report made investors more risk-on, with 47 different so-called junk bonds bringing in $12 billion of investor capital in October.
“Investors are assuming that the worst is over when it comes to Fed hikes,” Balchunas said. “People feel like it’s safe to come out again.”
The latest CPI report showed that consumer prices rose 0.4% for the month and 7.7% for the 12 months ending October 31, lower than Wall Street estimates. The Fed raised the target range for the federal funds rate by 75 basis points this month, marking the sixth consecutive rate hike and the fourth increase of 0.75%.
The FOMC will meet on December 13–14. Analysts expect the U.S. central bank will approve another rate hike, but this time it is expected to be an increase of 50 basis points rather than another 0.75% raise.
But there’s another reason why investors are returning to high yield ETFs, according to Balchunas: the yields. “If you look at what these things are yielding, you’re looking at 8%, which is pretty good,” he told VettaFi. “These used to yield half that.”
Investors looking to enter the high yield market while still managing risk may want to consider the Donoghue Forlines Tactical High Yield ETF (DFHY). DFHY is a fund of funds that tactically allocates exposure to high yield ETFs or U.S. Treasury ETFs.
The ETF seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FCF Tactical High Yield Index. DFHY aims to capture most of the upside while avoiding most of the downside of the high-yield asset class during a full credit market cycle.
The strategy uses proprietary defensive “tactical” indicators to mitigate downside volatility and preserve capital by shifting primarily towards intermediate-term treasury exposure during market declines. DFHY carries an expense ratio of 0.95%.
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