Furthermore, Legunn argued that more highly leveraged or junkier debt securities could be negatively impacted by the tax reform changes while more highly rated speculative-grade securities could outperform.

“Highly-levered CCC companies could experience a larger wave of defaults than previously expected prior to the new tax plan,” Legunn said. “In contrast, less-levered BB and B rated issuers may experience upgrades as they could become more profitable under the new plan. Relatedly, if one were to divide the high yield market into two segments, one comprised of higher-rated higher-quality bonds and another comprised of lower-rated lower-quality bonds, the higher-rated segment of the market might perform better than the lower-rated segment of the market under the new tax regime.”

Consequently, investors who want to capitalize on the potentially rosier outlook of the higher rated junk debt segment can consider something like the Xtrackers Low Beta High Yield Bond ETF (NYSEArca: HYDW). HYDW tries to reflect the performance of the Solactive USD High Yield Corporates Total Market Low Beta Index, which 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 with higher-credit quality that show a lower beta. HYDW shows a 4.22 year modified duration and a 4.05% yield to worst.

For more information on the fixed-income space, visit our bond ETFs category.

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