Keep The Yield, Ditch The Volatility With This Bond ETF

When it comes to bonds, many investors believe they have to sacrifice income and yield to reduce volatility. That belief perhaps explains why novice fixed income investors think they have to ditch high-yield corporate bonds when bond market volatility rises.

A new ETF can help investors stick with junk bonds while mitigating volatility. The IQ S&P High Yield Low Volatility Bond ETF (NYSE: HYLV) debuted last month. HYLV tracks the S&P U.S. High Yield Low Volatility Corporate Bond Index, which is [comprised] of U.S. dollar denominated high yield corporate bonds that have been selected in accordance with a rules-based methodology that seeks to identify securities that, in the aggregate, are expected to have lower volatility relative to the broad U.S. dollar denominated high yield corporate bond market, according to IndexIQ, a unit of MainStay Investments.

Obviously, HYLV is a new ETF, but its underlying index has some seasoning. While past performance is not indicative of future results with any index or security, the track record of the S&P U.S. High Yield Low Volatility Corporate Bond Index is worth examining.

Worth A Look

The back-tested results of the 17-year period ending Feb. 28, 2017, show that the S&P U.S. High Yield Low Volatility Corporate Bond Index may offer an intersection that bridges the volatility gap between the high-yield and investment-grade bond sectors, with increased return efficiency, said S&P Dow Jones Indices in a recent note.

HYLV's underlying index excludes the 50 percent of junk bonds that are thought to have the highest credit risk. Nearly two-thirds of the bonds in the index are rated BB+ or BB. None of the ETF's holdings sport highly speculative CCC or lower ratings. Knowing those data points, it is not surprising that HYLV's index has met its objective of being less volatile than the broader U.S. high-yield corporate bond market.

This increased return efficiency can also be seen from the S&P U.S. High Yield Low Volatility Corporate Bond Indexs higher ratio of return-to-volatility than that of the broad-based, high-yield index, said S&P Dow Jones.

HYLV's holdings have an average maturity of just over six years and an effective duration of 4.3 years, according to issuer data.

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