Recent concerns about selling pressure in some of the more exotic corners of the fixed income are stoking worries that junk bonds could come under pressure, but there are ways for investors to deal with the situation while still getting above-average yields.
One of the more unique ideas to consider in the high-yield corporate bond ETF arena is 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 seeks a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM.
“Some securities in the $680 billion market for collateralized loan obligations, or CLOs, lost about 5% in October, reflecting worries about rising risk in the complex investment vehicles,” reports Matt Wirz for the Wall Street Journal.
Why Now For HYGV
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.
“In recent years, CLOs have bought more than 60% of newly issued leveraged loans, according to S&P Market Intelligence,” according to the Journal. “That makes them a critical piece of the machinery that provides funding to businesses with lower credit ratings. Soft demand for CLO debt can flow through to the corporate-loan market, raising borrowing costs for companies.”
HYGV, which has a 30-day SEC yield of 6.41%, doesn’t feature CLO exposure. Home to 523 holdings, the FlexShares fund has an effective duration of 3.26 years.
HYGV features some speculative elements, namely a 17.57% weight to CCC-rated bonds, but the fund’s scoring methodology could help investors mitigate volatility if the high-yield corporate bond market grows turbulent.
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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.