First Trust Advisors has added a new menu item for investors
starving for dividend income in an era of unpalatable interest
The Wheaton, Ill.-based firm rolled out last weekFirst Trust
High Yield Long/Short ETF (
), an actively managed ETF that seeks to generate income from
investing in high-yield corporate bonds, aka junk bonds, while
selling short U.S. Treasury and corporate bonds in hopes of
profiting from falling bond prices.
This ETF is best suited for investors who are betting on
rising interest rates. That's because when interest rates rise,
bond prices will drop and eat away principal. Yields and prices
move in opposite directions.
"The short Treasury positions allow the portfolio managers to
isolate a portion of the interest-rate risk from the credit risk
inherent in high-yield securities," First Trust said in a
The fund's managers believe high-yield bonds offer less risk
as the economy recovers because companies are able to generate
ample cash flow, and default rates among junk bond issuers has
been rather low. The managers may also short sell junk bonds if
they anticipate an increase in corporate defaults.
HYLS charges a rather high annual expense ratio of 1.19%. Rick
Ferri, founder of Portfolio Solutions with $1.1 billion in assets
under management in Troy, Mich., says investors could apply the
same strategy at a much lower cost by buying a high-yield bond
ETF and selling short a Treasury bond ETF. For example you buy
longSPDR Barclays High Yield Bond (
), which carries a 0.4% expense ratio and currently yields 6.72%,
and short sell
iShares Barclays 20+
Year Treasury Bond (
), with a 0.15% expense ratio.
In accounts that don't allow short selling, the short position
could be taken with an inverse bond ETF such as
ProShares Short 20+
Year Treasury (
), with a 0.95% expense ratio. Those with high liquidity also
have tighter bid/ask spreads than a newly launched, thinly traded
The major risk of investing in a long/short strategy is that
both sides of the trade can go against you. If the economy
slumps, inflation declines and investors pile into risk-free
Treasurys, the fund will "get squeezed on the short side," says
Neil Leeson, ETF strategist at Ned Davis Research in Venice, Fla.
If rates stay the same, there's no need to hedge the long
position in high-yield bonds, he adds.
In Rich Winer's experience, long/short funds tend to perform
poorly long term. The president of Winer Wealth Management in
Woodland Hills, Calif., says such strategies may reduce
volatility, but they also reduce returns. He also believes fears
of a sudden spike in interest rates are overblown as the Federal
Reserve is expected to keep t rates low for another year if not
"The economic recovery will continue to be slow and steady,
and not provide any reason for the Fed to stop buying bonds or
raise interest rates," Winer said in an email. "Also, central
banks around the world are keeping rates low and implementing
New ALPS High Volatility ETF
ALPS Advisors last Thursday launched
Equity High Volatility Put Write Index Fund (
). Tracking the NYSE Arca U.S. Equity High Volatility Put Write
Index, the ETF buys stocks that trade in wide price ranges and
sells put options in hopes of generating income.
Put options are contracts that give the buyer the right, but
not the obligation, to sell a stock at a given price on a given
date. The put seller has to sell the stock if it hits the strike
A put option provides insurance or a hedge against falling
stock prices because it rises in value if the stock price drops.
Conversely, if the stock price goes up, the put will lose value
or expire worthless. The put seller profits if the stock price
goes up or stays the same.
The ETF aims to pay out 1.5% of fund assets every two months
as investment income or a short-term capital gain. But it's not
guaranteed and could be less if the ETF doesn't earn enough to
cover the payout.