Volatile conditions are rocking the markets, but that doesn’t mean the best strategy is to sit on the sidelines forever.
In the upcoming webcast, ETF Strategies for Managing Today’s Market Risks, Daniel Phillips, Director of Asset Allocation Strategy, Northern Trust Asset Management, and Bradley Camden, Director of Fixed Income Strategy, Northern Trust Asset Management, will outline strategies that may help investors generate attractive yields and still hedge potential downside risks ahead.
“The next frontier in high yield is applying the lessons gleaned from the 1.0 version of high yield ETFs towards a yield maximization high yield strategy,” according to FlexShares.
For example, the FlexShares High Yield Value-Scored Bond Index Fund (NYSE: HYGV) utilizes a unique screen for high-yield corporate debt. The FlexShares High Yield Value-Scored Bond Index Fund tires to reflect the performance of the Northern Trust High Yield Value-Scored US Corporate Bond Index, which 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.
Specifically, the ETF 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 to remove 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.
“Over time, we believe high yield has morphed into a more quality-focused and thus lower-yielding asset class. Too often, when investors today chose ‘market’ exposure to high yield, they are forced to leave income generation potential on the table. Likewise, portfolio construction frameworks that categorize assets into ‘risk’ and ‘risk control’ buckets are typically underwhelmed by the risk characteristics of market-weighted high yield products. We believe investors may be better served by high yield version 2.0 products that combine contemporary approaches with the keystone principle of high yield investing: focus on the ‘yielding’ aspects of high yield,” according to FlexShares.
Financial advisors who are interested in learning more about strategies to manage today’s market risks can register for the Thursday, May 7, webcast here.