Run Up The Score With This Bond ETF

With high-yield corporate bond exchange traded funds having already reclaimed all of last year's losses and then some to start 2019, it's unsurprising that some yield-hungry investors are revisiting this once-beloved group of funds.

While junk bonds and the corresponding ETFs are seductive by yield, some investors do not want to get too junky and demand value at a time when high-yield corporate debt is seen as pricey relative to recent norms.

What Happened

The FlexShares High Yield Value-Scored Bond Index Fund HYGV takes a fundamental approach to identifying value in the junk bond space. HYGV, which debuted last July, follows the FlexShares High Yield Value-Scored Bond Index Fund.

At the time of HYGV's launch, FlexShares said the index “utilizes Northern Trust’s proprietary credit scoring model to maximize factor inputs for value while screening for quality and liquidity risk,” according to a statement. “The fundamentals of the bond issuers are then evaluated against current market conditions, and the lowest-quality issuers are removed from the index.”

Why It's Important

The junk bond ETF arena has fierce competition, with dozens of funds residing in the space — but HYGV is off to a decent start with $38.23 million in assets under management. Many of these funds debuted during an era of low interest rates and tight credit spreads.

“The evolution of high yield has been supported by low market interest rates, tight credit spreads, shifting norms in corporate financial management, regulation, changing investor risk tolerances and new portfolio construction models," FlexShares said in a recent note.

HYGV has a weighted average effective duration of 3.93 years, an annual fee of 0.37 percent and a 30-day SEC yield of 8.4 percent. By comparison, those numbers on the largest U.S. junk bond ETF are 3.54 years, 0.49 percent and 6.04 percent.

There is some risk to consider with HYGV. Nearly 21 percent of the fund's 254 holdings carry one of the three highly speculative CCC ratings. Just 11 percent of the Markit iBoxx USD Liquid High Yield Index is rated somewhere in CCC territory.

What's Next

With the high-yield bond market evolving, investment approaches to that market should evolve too.

“We believe investors may be better served by high yield version 2.0 products that combine contemporary approaches with the keystone principle of high yield investing: focus on the 'yielding' aspects of high yield,” FlexShares said. 

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