AdvisorShares, one of the leading issuers of actively-managed ETFs, has teamed up with Peritus Asset Management to launch the first actively managed ETF focusing on the high yield debt space. The Peritus High Yield ETF (HYLD) began trading on Wednesday, offering investors an alternative to existing products in the High Yield Bonds ETFdb Category that seek to replicate the performance of fixed income benchmarks.
With interest rates near record lows–and not expected to recover any time soon–interest in high-yielding junk bonds has surged. Already in 2010 junk bond issuances have topped $230 billion, surpassing the record total of 2009 by more than 50%. Issuance next year may be in the range of $225 billion to $250 billion, according to Barclays Capital. Many investors have embraced the ETF structure to achieve exposure to high yield bonds; the iBoxx $ High Yield Bond Index Fund (HYG) has about $7 billion in assets, while the SPDR Barclays Capital High Yield Bond ETF (JNK) has AUM of close to $6 billion.
But some investors have expressed concerns with the methodologies behind the indexes underlying popular junk bond products. Indexed products tend to give the largest weightings to the largest debt issues outstanding, which means overweighting exposure to companies that have the most significant debt burdens. Moreover, because they seek broad exposure to the U.S. junk bond market, many junk bond ETFs are loaded with debt issued in connection with a wave of LBOs prior to the recent recession. As evidenced by Harrah’s recent woes attempting an IPO, the value of many of both debt and equity securities of companies involved in leveraged buyouts has been impaired considerably.
HYLD will present investors with access to a team of managers experienced in the high yield bond arena while still offering the flexibility and transparency that the ETF structure brings. The Peritus team takes a unique approach to junk bond investing, largely foregoing new issue participation in favor of the secondary market where it believes there are more attractive opportunities. There is also limited consideration given to the ratings assigned to debt securities by agencies such as S&P or Moody’s, reflecting a loss of confidence after some of the well-publicized missteps of these firms in recent years. Rather, Peritus views credit as either “AAA” or “D”: either a company will make good on its obligations to bondholders, or it won’t. “We are very excited to have launched HYLD with AdvisorShares as we believe many investors have begun to realize the benefits of yield in their portfolios,” said Tim Gramatovich, Chief Investment Officer of Peritus. “Delivering this via an ETF brings both transparency and liquidity to a much misunderstood asset class.”
HYLD also maintains the flexibility to establish positions in Treasuries in an attempt to hedge against a decline in the high yield market. Historically, collapses in the junk bond markets have been preceded by a narrowing of high yield spreads relative to Treasuries–investors in junk bonds not being sufficiently compensated for the risk they were taking on. So when credit spreads narrow to a point where the potential yield is no longer commensurate to the risk inherent in high yield bonds, the managers have the flexibility to more some of the portfolio into Treasuries. If a “flight to quality” follows, this flexibility can obviously be valuable to investors. The trade-off, of course, is in the lower yields offered by low risk Treasuries.
HYLD will generally hold between 40 and 60 individual debt securities, and at launch was exhibiting an effective duration in the neighborhood of three years. High yield bonds often exhibit less sensitivity to interest rate changes than Treasuries or investment grade corporates, and the inclusion of floating rate securities in the portfolios helps to reduce this sensitivity even further.
HYLD charges an expense ratio of 1.35%, considerably higher than indexed high yield bond products. JNK is the cheapest option for junk bond exposure through an ETF, charging just 0.40% annually.
Leader In The Active Arena
HYLD is the fifth actively-managed ETF launched by AdvisorShares, which has partnered with a different firm for each of its products. Other products include the Cambria Global Tactical ETF (GTAA), a product launched with the firm behind the influential book The Ivy Portfolio. GTAA, which began trading a little over a month ago, has already topped $50 million in assets [see Under The Hood of GTAA].
The company also made numerous filings for additional actively-managed ETFs, including a bear market fund and a global bond ETF.
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Disclosure: No positions at time of writing.