ProShares Unveils New High-Yield CDS ETFs


ProShares is one of the leading providers of alternative ETF strategies designed to supplement core holdings in an investor's portfolio. Its current lineup of 145 funds includes: inverse, leverage, volatility, fixed-income and a range of unconventional ETF indexes.

It just launched two new ETFs designed to give investors pure exposure to the credit component of the high-yield bond market.

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The ProShares CDS North American HY Credit ETF (TYTE) and ProShares CDS Short North American HY Credit ETF (WYDE) were introduced on the BATS exchange this week. These new ETFs are to provide pure exposure to changes in credit spreads by investing in index-based credit default swaps, instruments that reflect the market's view of a bond issuer's credit quality.

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The CDS market is considered an efficient and liquid method of gaining protection against corporate bond defaults. Both ETFs charge a net expense ratio of 0.5 percent and neither employs leverage.

"TYTE and WYDE have a variety of uses in sophisticated portfolios," said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC. "For instance, WYDE can be used to hedge against the credit risk in high yield bonds. With TYTE, investors can obtain exposure to the high yield bond market without the risk associated with rising interest rates."

In recent years, there have been inflows into high-yield bond funds, such as the iShares High Yield Corporate Bond ETF (HYG). This developed as a result of income investors reaching for greater returns in a zero interest rate environment, while subsequently moving down the credit ladder.

Some fixed-income experts have gone so far as to predict that the high-yield bubble will ultimately burst and lead to a wave of defaults and redemptions from this space.

A fund such as WYDE could potentially be used as a tool to hedge existing junk bond exposure. The inverse credit derivatives in this ETF would work as a counterweight to traditional high-yield bonds by reducing credit risk.

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