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
may want to have a look at the Market Vectors Treasury-Hedged
High Yield Bond ETF (
), 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
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
"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:
) debuted last month and now has over $3 million in assets under
For more on ETFs, click
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