Under The Hood: High-Yield, the Actively Managed Way
When it comes to actively managed ETFs, much ado has been made about the PIMCO Total Return ETF (NYSE: BOND). Colloquially known as the Bill Gross ETF, BOND has amassed almost $1.8 billion in assets under management in just three full months of trading, making it the largest actively managed ETF.
It is hard to criticize BOND. With an expense ratio of 0.55 percent, it is inexpensive in relation to many other actively managed funds. Obviously, it has been well-received among investors and the fund has backed that up with a solid performance.
Still, the mere existence of BOND arguably distracts investors from some other funds worthy of consideration in the actively managed ETF space. One of those funds is the Peritus High Yield ETF (NYSE: HYLD).
Not only does the Peritus High Yield ETF, which debuted in late 2010, fly somewhat under the radar among actively managed ETFs, but the fund arguably goes unnoticed among junk bond plays as well.
That is essentially what HYLD is - another ETF avenue for investors to gain exposure to high-yield bonds. Sub-adviser Peritus Asset Management, LLC "seeks to achieve the Fund's objective by selecting a focused portfolio of high yield debt securities that, via their coupons, generate a high current income stream," according to the AdvisorShares web site.
Using a value-based approach to the high-yield credit markets, Peritus typically eschews new issue participation in favor of the secondary market due to less competition and better opportunities for capital appreciation.
HYLD features a duration of 3.46 years, which is below the durations of the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE: HYG) and the SPDR S&P Barclays Capital High Yield Bond ETF (NYSE: JNK), the two largest junk bond ETFs. High-yield bonds typically have shorter durations than long-dated Treasuries, making the former less vulnerable to rising interest rates.
As has been duly noted plenty of times this year, high-yield bond ETFs represent viable alternatives for yield-starved investors that are willing to embrace a bit more risk. To the point of income generation, HYLD does not disappoint. The fund pays a monthly dividend and has a 30-day SEC yield of 10.58 percent. That is more than 300 basis points above the 30-day SEC yields found on HYG and JNK.
HYLD's holdings are splashed across an array of sectors with health care leading the way at 20 percent of the fund's weight. The ETF also features decent exposure to cyclical sectors such auto makers and parts suppliers, chemicals producers and transportation firms.
One knock on HYLD is its expense ratio of 1.36 percent - well above what investors can find with passively managed high-yield bond ETFs. Those fees do not indicate that HYLD is a "bad" ETF. Based on income-generating potential and year-to-date returns, HYLD is a solid pick for income investors. The high fee is the cost of admission for active management and the jaw-dropping yield.
For more on ETFs with high yields, click here.
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