Keep Volatility at Bay With This Fixed Income ETF | ETF Trends

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.

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.

“High-yield bonds are a risky corner of the market, and this is an area where active management of both credit and liquidity risk can make a lot of sense,” said Morningstar in a recent note. “A lot of funds out there–they are just following the composition of the market and oftentimes that means owning a lot of the most heavily indebted companies out there.”

The Right Time For HYLV ETF

Tumbling yields on safer government and corporate debt pushed investors toward 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.

“What I really like about this fund (HYLV) is that it’s investing in high-yield bonds in a risk-controlled way,” said Morningstar. “It’s effectively looking for bonds that have low yields and that are less sensitive to changes in credit spreads than some of their peers.”

One way HYLV keeps volatility low relative to its rivals is higher credit quality. About 85% of the fund’s holdings have one of the three BB ratings and it holds no CCC-rated debt.

“So, this is going to tilt toward higher-quality junk bonds. Most of the portfolio is parked in BB bonds. And I think that’s important if you are looking for a more defensive way of getting exposure to this area of the market,” according to Morningstar.

For more information on the speculative-grade debt market, visit our junk bonds category.