With Junk Bond Enthusiasm on the Mend, Consider This ETF | ETF Trends

Economic data, particularly employment numbers, remain concerning, but equity markets are defying that trend, prompting some investors to renew their enthusiasm for riskier corners of the corporate bond market.

That theme could benefit a number of ETFs, including 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 seek a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.

“Investors’ insatiable appetite for junk bonds is growing as retail funds are expected to add about $6 billion for the week ending May 27 — the third-biggest amount on record and the ninth straight week of inflows,” reports Bloomberg.JPMorgan Chase & Co. analysts reported the figure in a note on Thursday, citing Refinitiv Lipper data. Final numbers are expected later on Thursday.”

Good Time to Visit 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.

“May has seen $37.4 billion so far, and another $5 billion is slated to price before the end of this week, bringing the month’s volume to almost $42 billion. That would make it the busiest month since March 2017 when about $42.2 billion priced,” according to Bloomberg. “Junk bonds have rallied with yields dropping 98 basis points this month to close at 7.07% and spreads coming in 101bps to close at +643 on Wednesday.”

HYGV hones in on value with a proprietary credit scoring model that maximizes factor inputs for value while at the same time, effectively screens for quality and liquidity risk. The bond issuers are then fundamentally evaluated against current market conditions, with low-quality issuers precluded from the index.

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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.