There could be post-election implications for high-yield corporate debt, potentially putting exchange traded funds, such as the FlexShares High Yield Value-Scored Bond Index Fund (HYGV), in the spotlight. Fortunately, HYGV is designed to weather storms.
HYGV’s index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM. The fund generally will invest under normal circumstances at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its index.
“The eight elections for which ICE Indices LLC daily price returns are available are equally divided between Democratic candidate victories and Republican candidate victories,” writes Lehmann Livian Fridson Advisors LLC Chief Investment Officer Martin Fridson.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate the bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age, and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
Closing Out 2020: Near-Term Outlook
“Based on the admittedly small number of available observations, the probability of a pop is as great as the probability of a drop between Nov. 3 and Nov. 10, whether Donald Trump or Joe Biden wins. That is to say, returns in the immediate aftermath of next month’s election will most likely be determined by factors other than the election results, with a possible exception in the event of a contested outcome,” notes Fridson.
HYGV is significant at a time when many high-yield investors are still chastened by rampant credit downgrades. The weakness comes right after a record borrowing binge in recent years as many companies looked at the relatively low-rate environment as a cheap opportunity to borrow, with more investors willing to chase after speculative-grade debt for their more attractive yields.
Ultimately, HYGV could prove durable regardless of what happens on Election Day.
“Party-based model is inadequate for projecting high-yield return over the course of a presidential administration,” according to Fridson. “This is despite the fact that the mean annualized return during the Republican administrations was just 5.89%, versus 10.38% during the Democratic administrations. That difference, by the way, does not come close to being statistically significant, owing to the very small sample size.”