High yield is less risky with this value rated bond ETF

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Yields on Treasuries have increased, leading fixed income investors to question whether high yield is a preferred option, but it may be the case with ETFs like the FlexShares High Yield Bond Index Fund (HYGV).

As yields rise and spreads tighten, bond investors wonder if the high yield is worth the risk in order to extract that extra dose of income. Using its rated strategy, HYGV seeks to ensure that investors get quality exposure at high yield rather than simply getting the highest yields at the riskiest levels.

HYGV seeks investment results that generally match the price and yield performance of the Northern Trust High Yield Value-Scored US Corporate Bond Index, which reflects the performance of a broad universe of high yield corporate bonds denominated in US dollars and seeks a higher total yield than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond Index.

“HYGV’s methodology evaluates issuers based on factors such as valuation, creditworthiness, management efficiency and profitability,” said an analysis of the ETF database. “Securities are filtered for liquidity, and the portfolio imposes caps on individual bonds, issuers, sectors, duration, revenue and credit rating.”

“This fund is for investors looking to increase their income while avoiding some of the riskiest unwanted debt,” adds the analysis.

In order to extract a maximum return while limiting the duration in order to mitigate the interest rate risk, the fund mainly focuses on medium term debt. About 70% of debt securities have maturities of five to ten years.

Using a multifactor approach to high yield

At the heart of HYGV’s strategy is a multi-factor approach to achieving quality-driven performance. Not only will fixed income investors get the return they want, but they can also gain value exposure and income diversification.

“We believe that the composite value, quality and ranking of the index’s liquidity ratings create the potential for greater diversification and income generation, and can improve risk-adjusted returns. Initially, high yield ETFs were swept away by the old active high yield managers, ”said Focus on FlexShares funds noted. “They predicted disastrous market behavior and atypical performance results due to the all-day trading liquidity of ETFs and full price transparency. Our research suggests that these predictions have not held up over time. “

For more news, information and strategy, visit the website Multi-asset channel.


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