These are trying times for bond bulls. Even when accounting
for Tuesday's nearly three percent slide, 10-year Treasury yields
have surged 28.4 percent in the past 90 days.
That means tens of billions in destroyed capital in bonds and
scores of bond funds. Some investors are not waiting around for
the carnage to get any worse.
Over the past month, roughly $4 billion has been pulled from
U.S.-focused bond ETFs. It is no coincidence that the yield on
the 10-year Treasury has climbed more than seven percent over the
same time. Rising Treasury yields have sent investors scurrying
for shelter from the storm. The problem is finding such
Investment-grade corporate bonds and the corresponding ETFs
have traded lower. High-yield bond ETFs, normally more sensitive
to credit risk rather than rising rate risk, have dealt with
outflows and price retrenchment
However, there are some bond ETFs that while appearing riskier
on the surface, have dominated Treasuries in recent months.
Senior loan funds have been fairly sturdy as investors have
continued to pour capital into these funds to stay in the
high-yield while avoiding slumping Treasuries. Bank loan ETFs are
just one example of a bond sub-segment that has not completely
withered, but investors may want to give the newly minted
PowerShares Global Short Term High Yield Bond Portfolio (NYSE:
) a look as well.
Bond ETFs to Cope With Rising Interest Rates
PGHY debuted on June 20, which is the friendly way of saying
this ETF came to market just as Treasury yields were really
starting to run higher. Additionally, PGHY lives up to its global
billing as the U.S. accounts for 45 percent of the fund's weight,
but the fund also features significant emerging markets exposure.
Russia, Ukraine, Brazil, Venezuela and Turkey combine for over a
third of the new fund's weight.
That could be seen as a hurdle for PGHY at time of
struggles for emerging markets bond ETFs
. However, PGHY has actually risen 1.6 percent since its debut.
Said another way, since coming to market, has outpaced the
iShares 20+ Year Treasury Bond ETF (NYSE:
), the PIMCO Total Return ETF (NYSE:
) and emerging markets bond ETFs denominated in local
PGHY's effective duration of just 1.59 years clearly makes it
appealing in a rising rates environment. Another advantage:
Nearly three-quarters of the fund's 37 holdings are rated BB or
B, which are junk ratings. PGHY is not a pure junk bond ETF per
se, but its 30-day SEC yield of 3.78 percent is more than 100
basis points above 10-year Treasury yields. Plus, high-yield
bonds, particularly those with shorter maturities, are less
sensitive to interest rate risk than some other segments of the
Another understated advantage offered by PGHY is that, despite
the emerging markets calamity currently taking place, ETFs
offering exposure to dollar-denominated developing world debt
have not been too shabby since PGHY came to market. The iShares
J.P. Morgan USD Emerging Markets Bond ETF (NYSE:
) and the PowerShares Emerging Markets Sovereign Debt Portfolio
) have both traded slightly higher since PGHY debuted.
PGHY's holdings are dollar-denominated. That is the first
important point regarding the fund's developing world exposure.
The second important point is that, historically, when U.S.
interest rates rise, only convertibles and high-yield corporates
outpace emerging markets bonds
Add everything up and a case can be made that despite its
rookie status, PGHY could be an ideal avenue for investors
looking for fixed income exposure in the current market
For more on ETFs, click
Disclosure: Author owns none of the securities mentioned
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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