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ETF News And Commentary

Even with fears of a bond bubble and soaring equity prices, many investors continue to embrace bond ETFs for their portfolio. However, not just any bond ETF will do anymore, as the focus has been on short-term securities and those in the high yield space.

Funds with a tilt towards these characteristics have been extremely popular, with several—such as (BSV - ETF report) and (BKLN - ETF report)—adding more than $1.6 billion in AUM in the year-to-date period. Yet despite the popularity of the asset class, some of the best performing funds in the fixed income world have seen next to nothing in inflows during the time frame.

This trend is particularly the case with the Peritus High Yield ETF (HYLD - ETF report). This fund has only amassed a paltry $28 million in AUM so far in 2013, putting it far below the aforementioned top asset gainers, and below the average for the fixed income world as well.  While HYLD is a bit pricey, the fund has proven itself so far in 2013, adding 4.55% YTD (read The Comprehensive Guide to Junk Bond ETF Investing).

Although this may not sound like a lot, it is actually close to 65 basis points higher than the next closest fund——and about 160 basis points higher than the 2nd place high yield product ((ANGL - ETF report)). This suggests that the Peritus High Yield ETF has been earning its keep, and could be worth a closer look by fixed income ETF investors who a seeking an outperforming option in the space.

Inside HYLD

HYLD is an active ETF that focuses on the junk segment of the bond market. Its managers look to take a value-based approach, investing primarily in secondary market bonds, seeking to provide investors with a high current income level as well as capital appreciation.

In addition to its price outperformance, the fund has connected on the income front as well, as the product has a 30-Day SEC yield of 8.27%. This is despite the fact that HYLD has a duration that is about three-fourths of a year less (coming in at 3.24 years) than the Barclays U.S. High Yield Index.

These factors mean that the ETF is right in the wheelhouse for many investors in terms of both duration and yield. This suggests that credit risk will be the primary worry of this fund and that interest rate risk will not be much of an issue, something that many have grown to appreciate over the past few months and years (See 3 Actively Managed Bond ETFs for Stability and Income).

However, investors should note that the product is a bit pricey, and that the active management does come with a cost. Total fees come in at 1.35%, with a 1.1% management fee and a 25 basis point ‘other expense’.

It is also worth pointing out that AUM is at about $200 million with volume at roughly 50,000 shares a day. This could increase total costs in the form of bid ask spreads, but observed levels of the spread have been very tight, so this shouldn’t be much of a concern.

HYLD Holdings

In terms of the bonds in the ETF’s portfolio, the focus in on those rated between B+ and B- by S&P. These account for 75% of the total holdings with the remaining quarter rounded out by bonds that are rated BB- (7%) or CCC+ and below (18%).

For individual securities, the portfolio is extremely well spread out, as no single bond accounts for more than 2.5% of assets. Sectors are also well diversified, but there is a bit of a focus on health care, as two of these segments combine to account for 17% of the total (see Guide to 10 Great ETFs Yielding 7% or More).

Bottom Line

HYLD is what many fixed income ETF investors have been looking for in 2013. It has a low duration and a huge yield, while it also outperformed similar bond ETFs over long time periods.

While it is a lot pricier than its competitors, its active management strategies have proven to be worth the extra cost by a pretty healthy margin. So if you are still in the market for a fixed income ETF, don’t overlook this outperforming-- and high yielding-- fund from AdvisorShares.

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