Despite inflation refusing to be tamped down by the Federal Reserve raising interest rates, there’s been a strong bid for high-yield fixed income. After the U.K. pension crisis spilled over into U.S. assets, the resulting selloff of U.S. junk bonds led to yields not seen since 2020 when credit markets froze at the beginning of the pandemic.
And with yields at an average of 9.33% — up from 4.4% at the start of the year, according to the ICE BofA US High Yield Index — the $1.5 trillion sector is looking increasingly appealing to investors.
“Fixed income is back in vogue,” said Michael Kirkpatrick, senior portfolio manager at Seix Investment Advisors, in an interview with MarketWatch. “You can be invested in fixed income again.”
But high-yield fixed income is not without risk. The ICE index saw a total return of -13.9% year-to-date through Oct. 20. Still, that’s better than the S&P 500’s 22.6% decline during the same period.
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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