Market Overview

Nifty New Bond ETF Has Low Duration, High Yield

Nifty New Bond ETF Has Low Duration, High Yield

These are trying times for bond bulls. Even when accounting for Tuesday's nearly three percent slide, 10-year Treasury yields have surged 28.4 percent in the past 90 days.

That means tens of billions in destroyed capital in bonds and scores of bond funds. Some investors are not waiting around for the carnage to get any worse.

Over the past month, roughly $4 billion has been pulled from U.S.-focused bond ETFs. It is no coincidence that the yield on the 10-year Treasury has climbed more than seven percent over the same time. Rising Treasury yields have sent investors scurrying for shelter from the storm. The problem is finding such shelter.

Investment-grade corporate bonds and the corresponding ETFs have traded lower. High-yield bond ETFs, normally more sensitive to credit risk rather than rising rate risk, have dealt with bouts of outflows and price retrenchment.

However, there are some bond ETFs that while appearing riskier on the surface, have dominated Treasuries in recent months. Senior loan funds have been fairly sturdy as investors have continued to pour capital into these funds to stay in the high-yield while avoiding slumping Treasuries. Bank loan ETFs are just one example of a bond sub-segment that has not completely withered, but investors may want to give the newly minted PowerShares Global Short Term High Yield Bond Portfolio (NYSE: PGHY) a look as well.

Related: Bond ETFs to Cope With Rising Interest Rates.

PGHY debuted on June 20, which is the friendly way of saying this ETF came to market just as Treasury yields were really starting to run higher. Additionally, PGHY lives up to its global billing as the U.S. accounts for 45 percent of the fund's weight, but the fund also features significant emerging markets exposure. Russia, Ukraine, Brazil, Venezuela and Turkey combine for over a third of the new fund's weight.

That could be seen as a hurdle for PGHY at time of struggles for emerging markets bond ETFs. However, PGHY has actually risen 1.6 percent since its debut. Said another way, since coming to market, has outpaced the iShares 20+ Year Treasury Bond ETF (NYSE: TLT), the PIMCO Total Return ETF (NYSE: BOND) and emerging markets bond ETFs denominated in local currencies.

PGHY's effective duration of just 1.59 years clearly makes it appealing in a rising rates environment. Another advantage: Nearly three-quarters of the fund's 37 holdings are rated BB or B, which are junk ratings. PGHY is not a pure junk bond ETF per se, but its 30-day SEC yield of 3.78 percent is more than 100 basis points above 10-year Treasury yields. Plus, high-yield bonds, particularly those with shorter maturities, are less sensitive to interest rate risk than some other segments of the bond market.

Another understated advantage offered by PGHY is that, despite the emerging markets calamity currently taking place, ETFs offering exposure to dollar-denominated developing world debt have not been too shabby since PGHY came to market. The iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSE: EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY) have both traded slightly higher since PGHY debuted.

PGHY's holdings are dollar-denominated. That is the first important point regarding the fund's developing world exposure. The second important point is that, historically, when U.S. interest rates rise, only convertibles and high-yield corporates outpace emerging markets bonds.

Add everything up and a case can be made that despite its rookie status, PGHY could be an ideal avenue for investors looking for fixed income exposure in the current market environment.

For more on ETFs, click here.

Disclosure: Author owns none of the securities mentioned here.

Posted-In: Long Ideas News Bonds Short Ideas Emerging Markets Specialty ETFs New ETFs Intraday Update Best of Benzinga


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