High-yield corporate bonds aren’t necessarily inexpensive these days, but in a low Treasury yield environment, junk bonds are useful for income investors. One noteworthy quality play the FlexShares High Yield Value-Scored Bond Index Fund (HYGV).
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.
HYGV’s 0.37% expense ratio is looking attractive in an increasingly expensive high-yield market.
Goldman Sachs “highlighted signs the high-yield market is looking pricey. First, the market’s rising tide is lifting all junk-rated boats: The gap between valuations on different bonds has narrowed, meaning there are fewer deals for professional bond pickers. For example, only about 10% of bonds in the high-yield market are trading with yields of more than 5 percentage points above Treasuries, compared with 25% in November,” reports Alexandra Scaggs for Barron’s.
With HYGV, Quality Is Always On the Menu
With its unique scoring methodology, HYGV offers investors a potentially better mousetrap for junk bonds, especially for those seeking long-term, yield-bearing allocations.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizing Northern Trust Credit Scoring methodology to eliminate the bottom 10% of issuers; performing liquidity assessments based on issuer’s debt outstanding, age, and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intending to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
“The relative scarcity of places to put cash creates a headwind for Goldman Sachs’ bullish view on the high-yield market, wrote strategist Michael Puempel,” adds Barron’s. “But while the scarcity of good bargains may be a sign that high-yield valuations are stretched, it doesn’t mean that junk bonds can’t continue to outperform higher-rated markets, such as Treasuries and investment-grade bonds. Treasuries have marked steep losses this year as their yields have climbed, and few on Wall Street expect yields to stop climbing until the 10-year yield reaches 2%”
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