The Federal Reserve cut interest rates on Wednesday and the door is open for perhaps another rate cut later this year. That could send advisors and investors looking for fresher approaches to high-yield corporate bonds, including the FlexShares High Yield Value-Scored Bond Index Fund (HYGV).
HYGV seeks investment results that correspond generally to the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond IndexSM (the underlying index). The fund generally will invest at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its underlying index. The underlying index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM.
There are strategies investors can look to that incorporate fixed income with other assets to create a complementary portfolio that creates what they want–and that’s yield. HYGV is one of those options.
High-yield debt provides diversification by helping investors diversify fixed-income or rate risk and equity exposure. While high-yield is consider a riskier asset with higher correlation to equities than investment-grade debt, the debt category provides potential opportunities for positive risk-adjusted returns.
HYGV ETF Details
HYGV, which is just over a year old, holds 362 bonds and has a tempting 30-day SEC yield of 6.87%, high compared to some traditional junk bond ETFs. HYGV’s duration is 3.31 years and more than 96% of its holdings have maturities of less than 10 years.
HYGV is a value play in a corner of the ETF market where factor application is still in its nascent stages. Similar to the equities market, fixed-income assets also exhibit factor characteristics. Examining the returns from style factors versus the Merrill Lynch High Yield US Corporate Bond Index from 2003 through 2016, the Value style has been the best performing factor, followed by quality and low volatility.
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 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.
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