Riskier bonds got a boost in the second quarter and while that may compel some investors to chase yield, a conservative approach may be advisable. That’s attainable with 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 Index (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.
“Most notably, investors piled back into riskier fixed-income assets on ‘V-shaped recovery’ hopes. Leveraged loans, high-yield bonds, and emerging-markets debt, the three biggest losers of the first quarter, reemerged from the rubble in 2020,” writes Morningstar analyst Gabriel Denis.
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.
Even with HYGV’s quality tilt, it doesn’t short change investors when it comes to yield as the FlexShares fund currently yields 7.74%. Plus, HYGV and other corporate debt instruments are being underpinned by Federal Reserve support for both investment-grade and high-yield bonds.
“Investors gleefully piled into corporate debt amid optimism over robust central bank and government support for the market. Throughout the quarter, the Fed provided additional ballast for both investment-grade and high-yield corporate bonds, both increasing the scope of its bond-buying program,” according to Morningstar.
Home to $170 million in assets under management, HYGV holds 640 bonds with an effective duration of four years, putting the fund in intermediate-term territory.
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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.