High-yield corporate bonds are off to solid starts in the new year. But that’s not license for investors to take on too much risk. In fact, now’s a good time to implement quality with junk bonds via 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.
Supply of new junk bonds is strong to start 2021, confirming that HYGV’s quality approach is all the more relevant.
“Even while the pandemic crippled much of the U.S. economy last year, U.S. companies borrowed record amounts in the bond market, including making a big push in January. In doing so, they have seized on ultralow borrowing costs available through a global hunt for yield and the persistence of highly accommodative central bank policies, including by the Federal Reserve,” reports Joy Wiltermuth for MarketWatch.
Hello HYGV: Bond Income in a Tough Environment
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.
HYGV isn’t just about boosting yield. It offers advisors a way to increase fixed income quality in client portfolios. That’s a relevant consideration due to a recent increase in default rates in the high-yield space.
“But as Goldman’s team, led by Lotfi Karoui, pointed out in a weekly note, about 78% of this year’s junk-bond issuance has been earmarked for debt repayment and refinancing, or a ‘bondholder friendliness’ that allows businesses to ‘further capitalize on historically low debt issuance costs,’ without necessarily adding to their overall debt burdens,” according to MarketWatch.
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.
For more on multi-asset strategies, visit our Multi-Asset Channel.
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.