Treasury yields have been moving higher, making fixed income investors wonder whether high yield is a prime option, but it can be with ETFs like the FlexShares High Yield Value-Scored Bond Index Fund (HYGV).
As yields rise and spreads tighten, bond investors are pondering whether high yield is worth the risk in order to extract that extra dose of income. Using its scored strategy, HYGV seeks to ensure that investors get quality exposure to high yield as opposed to simply obtaining the highest yields at the riskiest levels.
HYGV seeks investment results that generally correspond to the price and yield performance of the Northern Trust High Yield Value-Scored U.S. Corporate Bond Index, which reflects the performance of a broad universe of U.S.-dollar denominated high-yield corporate bonds and seeks a higher total return than the overall high-yield corporate bond market, as represented by the Northern Trust High Yield U.S. Corporate Bond Index.
“HYGV’s methodology rates issuers based on factors like valuation, solvency, management efficiency and profitability,” an ETF Database analysis said. “The securities are screened for liquidity, and the portfolio imposes caps on individual bonds, issuers, sectors, duration, turnover and credit score.”
“This fund is for investors looking to add income while avoiding some of the riskiest junk debt,” the analysis added.
To extract maximum yield while also limiting duration to tamp down interest rate risk, the fund primarily focuses on intermediate-term debt. About 70% of the debt holdings fall within maturities of five to 10 years.
Utilizing a Multi-Factor Approach to High Yield
At the heart of HYGV’s strategy is a multi-factor approach to obtain quality-focused yield. Not only will fixed income investors get the yield they desire, they can obtain value-oriented exposure and diversification of income.
“We believe that the index’s composite value, quality and liquidity score ranking creates the potential for greater diversification and income generation, and may enhance risk-adjusted returns. Initially, high-yield ETFs were panned by legacy high-yield active managers,” a FlexShares Fund Focus said. “They predicted dire market behaviors and atypical performance outcomes due to the ETFs’ all-day trading liquidity and full price transparency. Our research suggests that those predictions have not held up with the passage of time.”
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