High-yield corporate bonds are often among the most volatile parts of the fixed income market. Some exchange traded funds can reduce the volatility associated with high-yield credit, including the Xtrackers Low Beta High Yield Bond ETF (NYSEArca: HYDW).
HYDW holds about 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.
“In the past few weeks, high-yield bonds—those deemed the riskiest debt and that offer commensurately higher coupons, as a result—have suffered amid concerns the investment vehicles are vulnerable to lower crude values. That is because energy bonds make up a sizable, 15%, of benchmark indices focusing on so-called junk debt,” according to MarketWatch.
Energy issuers are the second-largest group in HYDW, but a scant percentage of the fund’s components reside in the highly speculative CCC rating category.
More HYDW ETF Details
Assets deemed as low volatility usually offer better risk-adjusted returns over the long-term. Investors are embracing HYDW’s strategy.
The ETF debuted last January and has $137.51 million in assets under management, making it one of the more successful fixed income ETFs that debuted this year. While investors have been departing traditional junk bond ETFs in the current quarter, HYDW has actually seen modest inflows.
Specifically, high-yield bonds, like their names suggest, provide opportunities for enhanced yields. Since 1994, the high yield bond market has exhibited an average spread of 509 basis points above Treasuries.
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.
HYDW has a modified duration to worst of 2.94 years.
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