Although interest rates are rising, investors can remain engage with high-yield corporate bond exchange traded funds by opting for lower duration fare, including the PIMCO 0-5 Year High Yield Corporate Bond (NYSEArca: HYS).
HYS tracks the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index and “is designed to capture, before fees and expenses, continuous exposure to the short maturity segment of the high yield corporate bond sector,” according to PIMCO.
HYS, which recently turned seven years old, has an effective duration of just 2.14 years, putting it in the low duration category. Investors have been skittish about high-yield corporate debt this year with the Federal Reserve eyeing up to to four interest rate hikes, two of which have already been delivered.
ETFs can used for high yield exposure to these bonds while minimizing the credit risk. With their high yields with respect to their investment-grade corporate bond counterparts, junk bonds can also help hedge rate risk, especially with the Federal Reserve primed for more rate hikes in September and December.
Trimming Rate Risk
“A short-term high yield strategy may have lower volatility than a broad maturity high yield strategy, a lower correlation to equities and an even greater inverse correlation to Treasuries. The fund had a duration of 2.2 years on June 30, 2018, compared with 3.7 years for a broad high yield index (as represented by The ICE BofAML US High Yield Index),” according to the issuer.