Data suggest bearish traders are parting ways with some big-name high-yield corporate debt ETFs, a theme that could benefit some of the category’s hidden gems, such as the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
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 seek a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.
With the Federal Reserve supporting the corporate bond market, short positions on some benchmark ETFs in the group are evaporating.
“Short interest as a percentage of shares outstanding on the $12 billion SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, sank below 2% — a four-year low — after surging to as high as 25% in early March,” reports Bloomberg. “For the $25 billion iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, bearish wagers are at the lowest level this year.”
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.
“After the Fed pledged to shore up credit markets in March, investors have rushed into front-run the move, with the announcement alone causing enough demand to restore order. The central bank’s backstop is giving investors confidence to step into the market despite growing social unrest, uncertainty about coronavirus spread and increased tension between the U.S. and China,” according to Bloomberg.
Data confirm that investors are flocking to junk bond funds in search of higher income and it’s possible HYGV will get a larger slice of that pie going forward. The Fed supporting this corner of the market could compel investors to look at higher quality alternatives, including the FlexShares fund.
For more on multi-asset strategies, please visit our Multi-Asset Channel.
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.