Van Eck launched a new ETF on the
stock market today
that pays monthly interest payments from junk bonds while
hedging its bets should interest rise back to normal levels.
Market Vectors Treasury-Hedged High Yield Bond ETF (
) holds a portfolio of high-yield corporate bonds while shorting
five-year Treasury notes. Bond prices and yields move in opposite
directions. And the greater a bond's duration, the most sensitive
it is to interest rate changes.
If interest rates rise, the high-yield bond prices will fall
while the short position in Treasuries will rise, dampening the
price drop in the junk bonds.
But watch out for an environment of falling rates. "Falling
interest rates and negative high-yield performance, as in 2008,
will result in significant loss of return," Van Eck states in the
prospectus and fund fact sheet.
Rising interest rates and narrowing credit spreads, as in
2009, will produce gains when subtracting the performance of the
five-year Treasuries from the bond portfolio. Flat interest rates
and narrowing credit spreads, as in 2012, will result in
THHY plans to pay dividends monthly. It charges a hefty
management fee: 1.45% of assets a year.
"I would only recommend THHY for those who could afford some
risk in their portfolio and probably not more than a 3%-5%
allocation," Ronald Lang, principal at Atlas Wealth Management in
Philadelphia with $20 million in assets under management, said in
an email. "It may not be worth the added expense if you are
looking longer-term -- more than five years -- because interest
rates can only go in one direction, up, which will bring down the
"As long as the interest rates stay under 1.5%-2%, then stay
short-term (two-four years) with THHY," Lang added. "If there is
a sell-off in high-yield bonds, this is only a small part of your
portfolio and they are paying you a monthly dividend."
Bonds in the portfolio yield an average of 4.33% and have an
average duration of nearly nine years.
"With inflation, taxes and advisory fees built in, the client
will need an annual gross return of 6% or better to make this ETF
a worthwhile part of their defensive portfolio allocation," Lang
could reproduce the strategy by buyingSPDR Barclays High Yield
) or iShares iBoxx $High Yield Corporate Bond (
) and shorting iShares 3-7Year Treasury Bond ETF (
) orVanguard Intermediate-Term Government Bond ETF (
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