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A Junk Bond ETF For Skittish Investors

September 3, 2019 7:39 am
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Novice investors can be put off by the credit risk associated with high-yield corporate debt, making the hunt for income that much for difficult in today's low-yield climate, but some exchange traded funds are designed to mitigate some of the volatility associated with junk debt.

What Happened

The Xtrackers Low Beta High Yield Bond ETF (NYSE:HYDW) is one of those funds. The $144 million HYDW, is about 20 months old, follows the Solactive USD High Yield Corporates Total Market Low Beta Index.

Proving that the low volatility factor is efficacious in asset classes beyond stocks, HYDW hit an all-time high on Aug. 29 and is outpacing the largest traditional junk bond ETF on a year-to-date basis.

Why It's Important

“The objective of this junk bond ETF is to target higher-quality issues with less beta relative to the broad high-yield corporate bond market. As such, HYDW features barely any exposure to highly speculative CCC-rated bonds. Over 97% of the fund’s holdings are rated BB or B. In terms of lowering beta, this junk bond ETF does that with a beta of just 0.23,” reports InvestorPlace.

That's important because recent data suggest the quality of junk debt is decreasing. Last month, Moody’s Covenant Quality Indicator (CQI) fell to 4.56, which is actually lower than the worst possible reading of five.

The trade off for lower risk with bonds usually means lower yields and that is the case with HYDW. Its trailing 12-month yield of about 4.5% is roughly 80 basis points below the largest junk bond fund's corresponding yield.

What's Next

Income investors are caught between a rock and a hard place right now. Treasury yields are declining on an almost daily basis and junk debt quality is worsening. Currently, some market observers believe there is too much and not enough reward with high-yield corporate debt, but for investors desperate for yield, HYDW presents an opportunity for income in less volatile fashion than a standard junk bond ETF.

What would cloud the near-term outlook for HYDW would be more recession signs because market participants would likely punish junk bonds as a way of expressing views on a potential economic contraction.

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