On Thursday, Columbia Threadneedle announced that it has released two new high yield ETFs. These new funds are the Columbia U.S. High Yield ETF (NJNK ) and the Columbia Short Duration High Yield ETF (HYSD).
Managing Risk in High Yield
NJNK is an actively managed fund with a net expense ratio of 0.46%. For investors, NJNK seeks to provide income through a risk-managed strategy.
Leveraging Columbia Threadneedle’s extensive experience in the market, NJNK uses a disciplined rules-based methodology to generate risk-adjusted returns. To mitigate risk of default, a large majority of the fund’s portfolio contains BB- and B-rated high yield bonds.
A smaller portion of NJNK’s portfolio will be allocated to CCC-rated bonds. When choosing CCC-rated bonds to add to the fund, Columbia Threadneedle’s portfolio team seeks the securities that offer the highest risk, but also the highest return. With this strategy, NJNK can offer strong potential income for investors, while buoying against risk with higher-credit junk bonds.
“If investors think that the equity market is overvalued and they’re worried about rates falling for the wrong reasons or there’s a recession, I think high yield is a good surrogate to invest in relative to equities,” noted Daniel DeYoung, Columbia Threadneedle Senior Portfolio Manager, High Yield Fixed Income. “You’re still going to clip a high coupon, get high single digit returns potentially, and you’re lowering your volatility within the asset class.”
Generating Alpha in a Short-Duration Portfolio
Meanwhile, HYSD focuses on gaining income through a short-duration strategy. The ETF is actively managed and has a net expense ratio of 0.44%.
HYSD invests in both high yield corporate bonds and floating rate funds. With an active management team and disciplined investment strategy, the fund seeks to mitigate the risk present in these funds.
Along with the inherent promise of high income, HYSD also aims to provide investors with attractive alpha. The key driver for alpha generation in HYSD lies in Columbia Threadneedle’s bottom-up credit election process. By utilizing experienced credit research, the fund could offer stronger risk management and alpha than a traditional short-duration high yield strategy
“The Sharpe ratio for short duration high yield is actually one of the best within fixed income,” added Kris Keller, CFA, Columbia Threadneedle Portfolio Manager, High Yield Fixed Income. “It’s just one more option for investors that want to seek income when you may have questions about what the future macroeconomic outlook looks like.”
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