Inflation shouldn’t chase income investors from high yield corporate debt. That’s particularly true if they embrace quality strategies such as the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
HYGV’s index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM. The fund generally will invest under normal circumstances at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its index.
Underscoring the utility of HYGV in an inflationary environment are data confirming junk bonds aren’t highly correlated to rising consumer prices.
“It may be useful to explore the past relationship between high-yield bonds and their correlation to inflation over both a 5-year and 10-year history, if for no other reasons than to help us give reason to manage expectations. So, what does history show?,” according to FlexShares research. “Going back to the beginning of 2010, high-yield bonds have had a correlation to the Consumer Price Index of just 0.43 and since 2015, they have had a correlation of 0.56. While a correlation of 0.43 is not a particularly strong one, the fact that it has increased over the 5-year time frame does imply some relationship.”
The HYGV ETF: An Inflation Fighter
With yields on U.S. government debt depressed and likely to remain that way for several years, advisors are looking to other corners of the bond market to source income. Predictability, some will embrace high yield corporate debt and the relevant exchange traded funds.
“High-yield bonds can be like equities, in that we believe they are often strongly linked to the businesses and corporations that they represent. In our opinion, this means that rising inflation rates and the potential for a corresponding increase in interest rates, won’t necessarily cause high-yield bonds to plunge, as there are other factors at play,” notes FlexShares.
With its unique scoring methodology, HYGV offers investors a potentially better mousetrap for junk bonds, especially for those seeking long-term, yield-bearing allocations.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizing Northern Trust Credit Scoring methodology to eliminate the bottom 10% of issuers; performing 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 intending to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
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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.