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ETF News And Commentary

The year 2013 can easily be earmarked as a year of the beginning of the ‘great rotation’ – from bonds to stocks – aided by improving economic conditions especially on the domestic front made it clear that rock-bottom interest rate environment prevailing in the U.S. would not last long. If this was not enough, heightened concerns related to the scaling back of the monetary easing policies by the Fed have made overall bond investing lose its luster.
 
A reduction in stimulus raises the interest rates thereby increasing yields and hurting the bonds prices. Amid such a backdrop, investors looking to maximize current income landed up in high-yield bonds in 2013 as these products are less vulnerable to interest rate risks thanks to their low duration (in general) and are less co-related to other sectors of the fixed income space. Also, high-yield bonds perform better in an uptrending economy (read: Forget BOND, Focus on These Junk Bond ETFs Instead).
 
Despite this fundamental, not all high-yields products fared better in 2013. One product PeritusHigh Yield ETF (HYLD - ETF report) stood out in the space. Below we are detailing the products:
 
HYLD in Focus
 
This fund is actively managed providing exposure to the junk segment of the U.S. bond market. With total assets of $457.1 million, HYLD is one of the popular ETFs in the active high yield bond space.
 
The fund aims to provide capital appreciation in addition to high yields. It invests in a variety of non-investment grade corporate debt securities by primarily employing a bottom-up approach of securities selection. It offers the best value and least credit risk to investors in the high yield space by investing in corporates with a lower effective duration of roughly 3.00 years thus effectively reducing interest rate risks.
 
Investors have to pay a higher fee for this decent exposure as HYLD charges 1.25% in expenses which is way above the average expenses charged by the high-yield space (55 bps a year).  Its actively managed nature can be held responsible for increased expenses.
 
The product holds 81 securities in the basket and the allocation is pretty spread out with no single holding accounting for more than 2.36% of the total.  Further, the ETF pays out a high annual yield of about 7.70% per annum. The fund returned 3.83% in the YTD frame (as of December 18) – highest among the top 10 high-yield bond ETFs this year.
 
Final Word
 
Lower duration and an impressively high yield compared to the likes of iShares iBoxx $ High Yield Corporate Bond ETF ((HYG - ETF report)), SPDR Barclays Capital High Yield Bond ETF ((JNK - ETF report)) and Senior Loan Portfolio ((BKLN - ETF report)) made HYLD a winner in the space.
 
Recently, the Fed announced a $10 billion monthly curtail in the QE program from January which is a danger signal in bond investing. However, this does not mean the complete wrap-up of the QE program, but a modest trimming. The flow of cheap money into the economy will continue at least for some time. (read: Buy These ETFs to Profit from The Great Duration Rotation).
 
Also, the Fed has vowed to keep the interest rate low for longer irrespective of the taper.  This should keep high-yield bond investing alive in 2014. An improving economy and relatively low-rates will trigger corporate earnings thus benefiting their bonds too. This should also minimize the default risks of the junk bond funds.
 
Though HYLD currently carries a Zacks Rank #5 (Strong Sell), we expect HYLD to pull through the taper-inflicted environment decently in early 2014. This may be an interesting choice for investors looking for a high yield and diversification in their portfolio. Genuine trouble might be felt in the space in the latter part of the year when the economy will likely be devoid of the Fed’s stimulus.

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