How to Limit Volatility With Junk Bonds

In the fixed income space, high-yield corporate bonds are usually more volatile than their investment-grade and sovereign debt counterparts. The IQ S&P High Yield Low Volatility Bond ETF (NYSEARCAHYLV) is an example of an exchange traded fund that can help investors mitigate some of the volatility associated with junk-rated corporates.

In fact, HYLV, which debuted in February, is the first ETF dedicated to limiting junk bond volatility. HYLV is a “Rules-based, fixed income ETF that seeks to provide lower volatility exposure to high yield bonds,” according to IndexIQ. The ETF “seeks to capture a large portion of the attractive yield offered by high yield bonds, while reducing the volatility with the riskiest credits.”

HYLV “won’t always keep pace with the market, but it should offer better downside protection, and better risk-adjusted performance than market-cap-weighted index alternatives over the long term,” said Morningstar in a note out last week.

Tumbling yields on safer government and corporate debt pushed investors towar riskier and higher yielding debt, like junk bonds. Furthermore, U.S. corporate bonds are enjoying a stronger tailwind in an environment of strong economic growth, healthy earnings and dropping default rates.

Adding to the allure of HYLV is the low volatility factor’s historical track record in both the equity and fixed income spaces. Assets deemed as low volatility usually offer better risk-adjusted returns over the long-term.