It’s the end of the year. That means now’s the time many index providers rebalance or reconfigure equity and fixed income gauges. The same holds true for issuers of ETFs that use in-house indexes. For the most part, index alterations aren’t earth-shattering news. But there are times when these change can be impactful. Take the case of the WisdomTree U.S. High Yield Corporate Bond Fund (QHY). It follows the WisdomTree U.S. High Yield Corporate Bond Index. That gauge was recently altered to better reflect the current state of the junk bond market.
Time will tell if the changes pay off for investors. But the enhancements could prove beneficial. That’s because they include the addition of equity momentum to the index’s fundamental methodology. And that is a potentially compelling added layer. That’s because high yield corporate bonds often sport higher correlations to stocks than other fixed income segments.
High Yield Bond ETF QHY Using Interesting Concept
QHY’s new look isn’t cause for alarm. If anything, it could be a prescient move. That’s because momentum is a widely deployed factor in the equity investing. That implies it could have benefits in the high-yield bond space.
“Why focus on equity momentum specifically? Corporate debt momentum can often be noisy, as fluctuations in bond prices can reflect a range of factors beyond fundamental changes in the issuer’s creditworthiness, such as duration and other issue-specific features,” noted Behnood Noei, WisdomTree director of fixed income. “Equity momentum, on the other hand, tends to provide a clearer signal, offering a focused view of market sentiment toward the issuer. By analyzing the equity side, we can better gauge the broader market perspective, serving as a useful check on our fundamental analysis.”
Noie pointed out that WisdomTree analyzed the combination of momentum and junk bonds over the period spanning 2016 to 2024. It discovered debt ranking in the highest momentum quintile with the best momentum scores beat lower momentum issues.
When to Revert to a Momentum Signal
There are checks on QHY’s momentum implementation. For example, it’s possible for a company to be cash flow negative while sporting strong equity momentum. Conversely, a firm can be dealing with sluggish equity momentum while generating ample free cash flow. In other words, sometimes momentum needs to be flexible and QHY now embraces that idea.
“A key aspect of our new approach is determining when to ‘turn off’ a momentum signal. Once a positive or negative momentum signal is activated, we use a longer-term momentum measure to decide when to revert,” concluded Noei. “Specifically, we look at the 12-month momentum, and a signal is turned off only when it falls below the top 30% or rises above the bottom 30%. This method ensures that we are not overly reactive to short-term fluctuations and keeps our focus on longer-term trends.”
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