Some ETFs can keep investors involved with high-yield corporate bonds while reducing interest rate risk. That group of funds includes the iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: SHYG).
Due to ongoing uncertainty over the Federal Reserve’s interest rate outlook, fixed-income investors should stick to short-term bond exchange traded funds. The yield and bond’s price have an inverse relationship, so bond funds with long durations would experience large price drops if rates were to rise. In contrast, short-duration bond funds will experience more muted volatility in case of sudden rate changes.
SHYG “seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years,” according to iShares.
‘SHYG’ Hold Over 600 Bonds
SHYG, which debuted nearly five years ago, tracks the Markit iBoxx USD Liquid High Yield 0-5 Index and holds over 600 bonds.
Bond investors would usually move down the yield curve to hedge against rising interest rate risks as a lower duration bond fund would have a lower sensitivity to changes in interest rates. However, while moving down the yield curve provides a greater level of safety, lower duration bond funds come with less appealing yields.
Related: Best Ideas for Long Duration Junk Bond Funds
SHYG’s effective duration is just 2.38 years, which is well below the durations found on traditional junk bond ETFs. Over 64% of the ETF’s holdings have maturities of 2 to 3 years or 3 to 5 years. SHYG invests at least 90% of its total assets in the component securities of the index, primarily high yield corporate debt, and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents.
Over 81% of SHYG’s holdings are rated BB or B while 13.64% carry the highly speculative CCC rating. Investors are compensated for that credit risk in the form of a 5.82% 30-day SEC yield. SHYG charges 0.30% per year, or $30 on a $10,000 investment.
For more information on the fixed-income space, visit our bond ETFs category.