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 (NYSEARCA: HYLV) 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.
“Low-volatility investment strategies have been successfully applied to stocks for years, but it is more challenging to apply the concept to the bond market,” according to Morningstar. “Bonds are more thinly traded than stocks, and stale prices can bias volatility downward, where more illiquid bonds may appear to be safer. Volatility also declines as bonds approach maturity, so past volatility may overstate a bond’s likely future volatility.”
HYLV tracks the the S&P U.S. High Yield Low Volatility Corporate Bond Index, which is comprised of U.S. dollar-denominated high-yield corporate bonds that have been selected using a rules-based methodology that identifies securities expected to have a lower volatility relative to the broader high-yield market.
At the end of the third quarter, HYLV had a 30-day SEC yield of 3.61%. About 84% of the ETF’s holdings are rated BB+, BB or BB-. HYLV has only scant exposure to speculative CCC-rated debt.
For more information on the credit market, visit our bond ETFs category.