A High-Yield Bond ETF That Focuses on Fundamentals | ETF Trends

While Treasury yields are tumbling, some income-hungry investors remain leery of high-yield coporate bonds and the related exchange traded funds due to what they perceive to be eroding fundamentals within the asset class.

The WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (CBOE: WFHY) is an example of an ETF that help investors stay engaged with high-yield debt with a focus in fundamentally sound issuers.

WFHY and its short-term counterpart, the WisdomTree Fundamental U.S. Short-Term High Yield Corporate Bond Fund (CBOE: SFHY), seek to provide investors with the potential to capture the performance of selected issuers in the U.S. high yield corporate bond market—they each have a net expense ratio of 0.38%.

“Some could argue investors are experiencing ‘risk-off round 3; at the present,” said WisdomTree in a recent note. “HY spreads, once again, narrowed throughout the first half of this year, but have since climbed back up over the +400 threshold to +422 bps, as of this writing. Given the volatility of late, we feel investors should consider looking at HY through a different lens going forward; one that focuses on the health of balance sheets.”


WFHY offers a compelling income proposition as one would expect with a high-yield bond fund. The WisdomTree ETF has a 30-day SEC yield of 5.27%, which it is able to deliver with only scant exposure to highly speculative CCC-rated debt. Those bonds represent just 4.11% of WFHY’s roster.

“The WisdomTree Index uses a combination of factors to identify bonds with favorable risk/reward in high yield. Step one of the process is to exclude issuers that do not have publicly traded equities and thus may not report public financials. In our view, these companies are under less scrutiny to manage a healthy balance sheet. This approach has helped our Index avoid nine defaults so far this year,” according to WisdomTree.

Said another way, investors concerned about rising default rates among junk issuers may want to consider WFHY because its methodology can mitigate default risk.

“By screening based on whether an issuer has positive or negative free-cash-flows, one can effectively target bonds that exhibit favorable fundamentals while presenting opportunities for income and screening out those that don’t,” said WisdomTree. “WisdomTree was one of the first to bring an entire suite of fundamentally weighted corporate bond ETFs to market.”

For more information on the bond market, visit ETFtrends.com.