There has been constant innovation in fixed income ETF launches over the last few months. The tactics of plain-vanilla bond ETFs do not seem to be in fashion anymore and issuers are focusing increasingly on active and smart-beta bond ETFs (read: Behind Rise of Smart Beta Bond ETFs).
Within the smart-beta spectrum, issuers are lately trying to eye low-beta or low volatile or defensive high-yield bond ETFs. Let’s find out why (read: 6 Best Bond ETFs of 2016 -- High Yield Tops).
Inside New Filings and Launches
Deutsche Asset Management lately filed a product – Deutsche X-trackers Low Beta High Yield Bond ETF. The fund will track the Solactive USD High Yield Corporates [Low Beta] Index. The Underlying Index looks to measure the performance of the U.S. dollar-denominated high yield corporate bond market that shows lower overall beta to the broader high yield corporate fixed income market, as per the prospectus.
If a security’s yield is lower than that of its sector’s median yield, it will likely get an entry into the index as lower yielding bonds normally have lower beta.
Then there is IQ S&P High Yield Low Volatility Bond ETF (HYLV - Free Report) . The fund looks to track the performance of the S&P U.S. High Yield Low Volatility Corporate Bond Index. The fund hit the market in mid-February this year and has amassed about $95.8 million in assets. It charges 40 bps in fees. The 30-Day SEC Yield for the 30-day period ended 3/31/17 was 3.65% for the fund. Consumer Discretionary was the top sector of the fund.
There is yet another fund —iShares Edge High Yield Defensive Bond ETF (HYDB - Free Report) .The productlooks to track an index that offers greater risk adjusted and total returns, relative to the broader high yield corporate bond market. This bond ETF also aims to lower risks of the high-yield space by targeting two factors — quality and value, as per the issuer.
The fund came into the market on July 11, 2017 and has amassed about $10 million in assets. The 30-day SEC Yield as of August 14, 2017 was 5.46%. It charges 35 bps in fees. Consumer Staples, Energy, Communications, Basic Industry, Consumer Cyclical and Technology get a double-digit weight in the fund (see all High-Yield/Junk Bond ETFs here).
Why Issuers Turn to Low Beta High Yield Bond ETFs
In a still-low rate environment especially in the developed economies, high-yield bond ETFs could provide investors with income potential. However, since most of the high-yield bonds are below investment grade, these carry higher default risks. So, a look at the low risk quotient along with a higher income opportunity is a good idea in the current investing landscape.
Since lower beta means that the security is less sensitive to broader market movements, the newly-filed ETF should help investors cut down on risk and volatility associated with high yield bonds.
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