A Junk Bond ETF For Jittery Investors

Skittish fixed income investors often dodge high-yield corporate bonds and the related exchange-traded funds. That is happening in a big way this year as the iShares iBoxx $ High Yield Corporate Bond ETF HYG and the SPDR Bloomberg Barclays High Yield Bond ETF JNK are bleeding assets.

JNK and HYG have lost more than $7 billion in assets on combined basis, ranking the ETFs fifth and sixth for year-to-date outflows. HYG and JNK are the two largest junk bond ETFs in the U.S. Investors looking for the income advantages of junk bonds with reduced volatility can consider the IQ S&P High Yield Low Volatility Bd ETF HYLV.

HYLV is just over a year old and tracks the S&P High Yield Low Volatility Corporate Bond Index. That benchmark “is compromised of U.S. dollar denominated high yield corporate bonds that have been selected in accordance with a rules-based methodology that seeks to identify securities that, in the aggregate, are expected to have lower volatility relative to the broad U.S. dollar denominated high yield corporate bond market,” according to IndexIQ.

HYLV's index launched in late 2016 and is benchmarked to the more traditional S&P U.S. High Yield Corporate Bond Index.

Inside HYLV

An obvious volatility reduction technique for any high-yield bond fund would avoiding CCC- and lower-rated debt as those are usually the most speculative junk bonds. HYLV does that as just 0.10 percent of its roster is allocated to bonds rated CCC+. Rather, more than 84 percent of HYLV's holdings are rated BB+, BB or BB-.

Over 36 percent of HYLV's holdings are from consumer discretionary and financial services issuers. HYLV's underlying index employs marginal contribution to risk (MCR) as a way ranking bonds in its selection universe, a strategy that helps it steer clear of the riskiest credits.

HYLV has a 30-day SEC yield of 3.96 percent, which is below the likes of HYG and JNK, but that's the trade-off to access HYLV's superior credit quality. The effective duration on HYLV is just over four years.

Doing Its Job

Last year, HYLV's index did its job in terms of being less volatile than rival benchmarks.

“The HYLV index did show lower volatility, at 1.67 percent compared to 2.0 percent for the benchmark,” said S&P Dow Jones Indices. “The negative correlation of -0.66 between these two variables indicates that when the broad high yield universe benefited from spread tightening, the HYLV index underperformed the benchmark from spread changes, and that spread widening would have less downward impact on the HYLV index than the benchmark.”

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