The high-yield corporate bond market is under some stress this year, but the right ETFs can help investors avoid some of this arena’s problem children. With that objective in mind, the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV) is an ETF to consider.
HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond IndexSM (the underlying index). The fund generally will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its underlying index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.
“Unlike the investment-grade market, the Federal Reserve isn’t going to be supporting the market for high-yield debt. And Wall Street strategists say that risky companies are far more likely to default than they were before the coronavirus brought the economy to a standstill,” reports Alexandra Scaggs for Barron’s.
Avoiding Junkiest of Junk
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
The $133 million FlexShares fund holds nearly 600 bonds and has a 30-day SEC yield of 6.32%. Over 74% of its holdings are rated BB or B.
“Citigroup, for example, is predicting that 10.4% of outstanding high-yield bonds could default this year and that 7.6% of leveraged loans could default. And investors who own risky bonds and loans will probably recover 30 cents and 50 cents on the dollar, respectively, the bank’s strategists say,” according to Barron’s.
HYGV hones in on value with a proprietary credit scoring model that maximizes factor inputs for value while at the same time, effectively screens for quality and liquidity risk. The bond issuers are then fundamentally evaluated against current market conditions, with low-quality issuers precluded from the index.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.