The wide world of fixed income has a lot of options for investors right now as bonds have roared back to life after a long dormant period that had some questioning the 60 / 40 portfolio. Things have changed though, with some suggesting that it may be time to flip the 60/40 with bonds the majority player in investors’ portfolios. Investors looking to expand their bond exposures may want to consider a high-yield corporate ETF like the WisdomTree U.S. High Yield Corporate Bond Fund (WFHY).
Corporate and high-yield categories have opened the year with returns toward the higher end of the fixed income spectrum, both returning 3.5% on a YTD basis. Corporates have added a mammoth $7.7 billion in YTD net inflows, as well.
Why are corporate bonds attracting such attention? Investors and market watchers are anticipating that despite some choppy waters in the interim, calm seas and high yields await on the other side for those who can handle some volatility. While there may be some concerns about bankruptcies when the much-discussed earnings recession hits markets this year, a short and shallow recession – a distinct possibility – may mitigate that issue for corporate debt investing.
Corporate bonds could represent a “once-in-a-decade opportunity” according to at least one market analyst, meanwhile, rebounding from a tough 2022. As such one high yield, corporate ETF to watch may be WFHY which tracks the WisdomTree Fundamental U.S. High Yield Corporate Bond Index.
The strategy could be particularly appropriate in a year in which identifying the right corporate bond issuers thanks to its quality screen. Starting with high-yield U.S. debt of any maturity, it selects firms first based on their free cash flows to equity and then removing the lowest-scoring 20%. Then, it ranks securities within each sector to remove the bottom 5% based on liquidity before weighting the remaining securities by default probabilities and leaning towards risk-adjusted high income.
WFHY charges 38 basis points for its approach, which has so far allowed it to outperform both its ETF Database Category Average and its Factset Segment Average over the last three months by 83 and 69 basis points respectively. It’s seen $8.9 million in net inflows over the last month, as well.
Investors are spoilt for choice in fixed income right now, but some areas are better than others – and high-yield corporate bonds, if they do prove to be offering a generational investment opportunity, could be one of them. For those investors looking at the bond subclass, WFHY is a high-yield corporate ETF to watch in the weeks ahead.
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