In the current environment of ultra-low rates, yield-starved
investors continue to search for products with higher levels of
income. Keeping this in mind, Market Vectors, the ETF arm of Van
Eck Global, has been at the forefront of high yield bond
innovation over the past year.
The firm recently launched the International High Yield Fund (
), the Emerging Markets High Yield Bond ETF (
) and the Fallen Angel High Yield Bond ETF (
). Many investors have poured a lot of money into high yield bond
funds like these in the last couple of years.
But since there are concerns that the interest rates may start
going up later this year or next, some investors are looking for
products that can provide a hedge against interest rate risk,
while still providing impressive yields (read:
Time for Inverse Bond ETFs?
For these income-starved investors, the
Market Vectors Treasury-Hedged High Yield Bond ETF (
was listed on March 21, 2013. The product seeks to provide a
higher level of income by investing in high yield corporate bonds
but at the same time reducing the interest rate risk to some
extent, thanks to a hedging strategy.
THHY in Focus
The new ETF seeks to match the price and yield performance of
the Market Vectors US Treasury-Hedged High Yield Bond Index,
before fees and expenses. The index holds below-investment-grade
or unrated high-yield U.S. corporate bonds that are hedged
against rising interest rates through exposure to Treasury
The fund intends to maintain both long and short positions -
long positions in junk corporate bonds and short positions in
5-year Treasury bonds, to hedge against adverse movements in
interest rates while still providing big yields (read:
Time to Exit Junk Bonds ETFs?
In total, THHY holds 65 securities which are widely spread
among various corporate bonds, as it puts nearly 35% of the
assets in the top 10 holdings. United States Treasury Bills, Ally
Financial and Hca Inc occupy the top three positions in the
basket that collectively make up for 13.6% share. Other notes do
not hold more than 3.6% of THHY's assets each.
Weighted average maturity is 6.53 years for the long positions
and 4.39 years for the short positions. Additionally, 82% of the
long portfolio is skewed towards industrials, followed by
financials at 13% and utilities at nearly 5% (see more
The product is less volatile than the broad maturity high
yield counterparts with a net effective and modified interest
rate durations of 1.89 years and 1.35 years, respectively.
Further, the product is a bit expensive, with an expense ratio
of 1.45% per annum - 0.45% in management fees, 0.95% in interest
on securities sold short and cost to borrow and 0.11% in other
How does it fit in a portfolio?
The product could be an interesting choice for investors
seeking exposure to the fixed income market while limiting
interest rate risk. The ETF aims to provide income potential of
high-yield corporate bonds in the current low-interest rate
environment while simultaneously seeking a short position in
Treasury notes to hedge against rising interest rates
Time to Exit Treasury Bond ETFs?
Since the historical correlation between high-yield securities
and traditional fixed-income instruments is low, the addition of
high-yield securities to a well-diversified portfolio has the
potential to improve returns and reduce overall portfolio
volatility due to diversification benefits.
Can it succeed?
This strategy looks to provide protection against a quick
spike in rates. In such a scenario, high yield bond prices could
slump, so it may be a good idea to have some defense in the form
of a T-bill hedge.
This could make this high yield bond play a lower risk option
for some investors, and thus a better choice. This is especially
true in the case of investors who fear a bond bubble but are
still looking to tap into the fixed income markets.
The group of investors fearing this situation is seemingly
growing by the day, so this new ETF could see some decent inflows
as a result. However, it should also be noted that the ETF may
face some stiff competition from a very similar product in the
The other main ETF targeting this market is the First Trust
High Yield Long/Short ETF (
). The ETF seeks to provide current income by investing primarily
in a diversified portfolio of below-investment-grade or unrated
high-yield debt securities, including U.S. and non-U.S. corporate
debt obligations, bank loans and convertible bonds (read:
First Trust Launches High Yield Long/Short
With 58 holdings in its basket, the fund is inexpensive
compared to THHY, charging 1.19% in fees per year from investors.
Thanks to this, its similar focus, and first mover advantage,
this ETF could pose as a big competitor to the just launched Van
Either way, it will be interesting to see if investors embrace
this new choice in the high yield world, or if dollars continue
to flow to riskier options in the space for their fixed income
Want the latest recommendations from Zacks Investment
Research? Today, you can download
7 Best Stocks for the Next 30 Days
Click to get this free report >>
MKT VEC-FA HYB (ANGL): ETF Research Reports
MKT VEC-EM HYB (HYEM): ETF Research Reports
FT-HY L/S (HYLS): ETF Research Reports
MKT VEC-INT HYB (IHY): ETF Research Reports
MKT VEC-TH HYB (THHY): ETF Research Reports
To read this article on Zacks.com click here.
Want the latest recommendations from Zacks
Investment Research? Today, you can download 7 Best Stocks for
the Next 30 Days. Click to get this free report