The vast majority of exchange-traded funds track an index and
charge rock-bottom fees. Advisor Shares Peritus High Yield is one
of a rare breed of ETFs that does neither--without any harm, so
far, to its shareholders. Over the past year, Peritus outpaced the
average junk-bond ETF by 3.8 percentage points.
In the relatively small junk-bond market, active management
works better than indexing, says Peritus co-manager Timothy
Gramatovich. For example, SPDR Barclays High Yield Bond, one of the
biggest junk ETFs, tracks an index that owns bond issues with
outstanding values of at least $500 million. Gramatovich and
co-manager Ron Heller can--and do--invest in smaller, potentially
more rewarding issues.
Their fund currently occupies the lower rungs of the junk-bond
credit spectrum, which explains its lofty 7.9% yield. It has 69% of
its assets in bonds with single-B ratings (compared with 39% for
the category average), says Morningstar, and nearly 30% in unrated
bonds and those rated below B. But Gramatovich argues that rating
agencies have a size bias, and as a result the bonds Peritus holds
receive lower ratings than they deserve.
As with any actively managed fund, you'll have to trust the
managers, Gramatovich and Heller, to get their research right.
That's especially so in light of the fund's 1.25% annual fee, which
is more than twice the average for junk-bond ETFs.