A Gentler Way to Junk Bond ETF Exposure | ETF Trends

With high-yield corporate debt and the related exchange traded funds rebounding to start 2019, some investors may want to revisit the asset class while doing so in conservative fashion. The Xtrackers Low Beta High Yield Bond ETF (NYSEArca: HYDW) is an ETF that helps with objective.

HYDW holds more than 400 junk-rated bonds and follows the Solactive USD High Yield Corporates Total Market Low Beta Index. That benchmark includes junk-rated debt that exhibits lower overall beta to the broader high-yield bond market. Consequently, the portfolio is comprised of lower-yielding junk bonds that show a lower beta.

“The objective of this junk bond ETF is to target higher-quality issues with less beta relative to the broad high-yield corporate bond market. As such, HYDW features barely any exposure to highly speculative CCC-rated bonds. Over 97% of the fund’s holdings are rated BB or B. In terms of lowering beta, this junk bond ETF does that with a beta of just 0.23,” reports InvestorPlace.

The current interest rate environment spotlights the interest rate risk associated with traditional junk bond funds, but some ETFs address that risk while keeping investors involved with relevant credit opportunities.


At the end of last year, HYDW had a modified duration to worst of 3.60 years and an average maturity of 4.60 years, according to issuer data.

In a rising rate environment, with the Federal Reserve eyeing a tighter monetary policy and interest rate normalization, high-yield bonds may outperform. High-yield bonds have historically exhibited a lower sensitivity to interest rate changes. During periods of rising rates, high-yield assets have returned a mean 4.23%, compared to the -1.22% decline in investment-grade debt and -2.46% drawdown for U.S. Treasuries.

However, the outlook for interest rates is more sanguine this year, a scenario that is luring investors back to some high-yield funds. HYDW’s 12-month yield of 4.27% is below that of traditional junk bond ETFs, but that is the trade-off investors make for tapping HYDW’s lower beta.

For more on bond funds and strategies, please visit our Fixed Income 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.