New ETF is Long High Yield, Short Treasuries

While the bulk of ETF inflows this year have been directed toward equity funds, bond funds still hold allure for investors looking for diversity and income.

Those investors looking for a twist on the traditional long bond ETFs may want to have a look at the Market Vectors Treasury-Hedged High Yield Bond ETF (NYSE: THHY), which opens for trading Friday.

The Market Vectors Treasury-Hedged High Yield Bond ETF, which was originally supposed to debut last month, provides investors long/short exposure through long positions in liquid high yield bonds and short positions in five-year U.S. Treasury notes.

Additionally, THHY could provide some coverage as high yield spreads over Treasuries narrow when interest rates increase.

THHY looks to serve two purposes: Income potential during low interest rate environments and loss protection in risk-off settings where junk bonds falter and Treasuries surge. Market Vectors notes that adding short positions in five-year Treasuries to a high yield bond portfolio will limit the loss of returns from rising rates.

With an average net yield to worst of 4.33 percent, THHY has an average modified interest rate duration of 0.18, according to Market Vectors data. Thirty-five percent of the long portfolio is rated BB while 42 percent is rated B and the average years to maturity for the new ETF's long positions is 8.61 years.

At the sector level, THHY's junk holdings are diversified with five industry groups communications, financial services, energy, consumer discretionary and non-cyclical consumer receiving double-digit allocations.

The new ETF tracks the Market Vectors U.S. Treasury-Hedged High Yield Bond Index (MTVHHY), which is home to nearly 700 holdings.

THHY's concept has previously proven useful in various market settings. Market Vectors noted that when interest rates remained flat while spreads narrowed last year, U.S. high yield gained almost 15.6 percent compared to just 2.3 percent for five-year Treasuries.

"Rising interest rates/narrowing credit spreads (2009): results in gains when deducting the performance of 5-year Treasuries from U.S. high yield," according to Market Vectors data. "Flat interest rates/narrowing credit spreads (2012): results in gains when deducting the performance of 5YT from USHY. In response (to low interest rates), fixed-income investors increased allocations to high-yield, longer-duration, and/or international bonds in search of yield."

THHY's unique concept does not come cheap as the new ETF has an annual net expense ratio of 1.45 percent. The fund is the second income product introduced by Market Vectors this year. The Market Vectors BDC Income ETF (NYSE:BIZD) debuted last month and now has over $3 million in assets under management.

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