Bond investments have hardly seen gains in 2013 thanks to taper
concerns. However, across the spectrum, the high-yield bond space
has been less ruffled, with most losing marginally in the YTD
The 'Fed Taper' and 'rising rates' normally go hand in hand. Ending
all speculations throughout the year, the Fed has now initiated a
modest tapering of $10 billion and could complete the process by
the end of 2014, if economic growth remains in line with their
expectations (also see
QE Tapering Could Make These Bond ETFs
While a rock-bottom interest rate environment prevailing in the
U.S. currently will excite investors to go for a high-yield option
in 2014, a continued taper threat is bound to come in the way of
Amid such a backdrop, WisdomTree
with two launches in the high-yield space in the name of
WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration
WisdomTree BofA Merrill Lynch High Yield Bond Negative
HYZD & HYND in Focus
These new ETFs were launched on December 18. While HYZD looks to
track the BofA Merrill Lynch 0-5 Year US High Yield Constrained,
Zero Duration Index, HYND tracks the BofA Merrill Lynch 0-5 Year
U.S. High Yield Constrained, Negative Seven Duration Index.
These indexes are a combination of the long and short portfolio.
The 'long portfolio' replicates the BofA Merrill Lynch 0-5 Year
U.S. High Yield Constrained Index for both the funds. It exposes
the U.S.-domiciled non-investment grade corporate debt securities
with maturity of less than five years (see
all the junk bond ETFs here
The distinction lies in the short portfolio of the indexes. For
HYZD, the index holds the short positions in U.S. Treasuries that
seeks to match up the duration of the long portfolio, with a
targeted total duration exposure of about zero years.
But for HYND, the short portfolio of the index surpasses the
duration of the long portfolio, thus resulting in a targeted total
duration exposure of nearly negative seven years.
The funds hold about 7% in cash and the debt securities having BBB
or lower graded bonds. Investors should also note that the products
carry default risks since these do not posses very high credit
ratings. HYZD charges investors 43 bps in annual fees while HYND
costs 48 bps.
How do these fit in a portfolio?
Investors who are looking for a fixed-income play thanks to the low
interest rate environment should consider these products. These
have been designed to counter interest rate risks in bond
With the modest tapering slated to take place in January and with
more of it being in the cards, a cushion against rising rates
became necessary through an inverse exposure to treasuries (read:
3 Bond ETFs Popular in the 'No Taper' Aftermath
Its zero/negative total duration profile will allay interest rate
risks. Also, the Fed has vowed to keep the interest rate low for
longer, irrespective of the taper. This should keep the
high-yield bond investing alive in 2014.
Lastly, high yield bonds behave nicely in a trending economy.
Hence, the more strength the U.S. economy is gaining, the greater
is the number of high-yield bond funds offered by the issuers.
The high-yield or junk bond space is stuffed with various products
from numerous issuers. Some of the popular names
are iShares iBoxx $ High Yield Corporate Bond ETF
SPDR Barclays Capital High Yield Bond ETF
PIMCO 0-5 Year High Yield Corporate Bond Index Fund (
Therefore, in order to show up in the space, HYZD and HYND will
have to promote their "short portfolio" nature which sets both
apart from most of the other products. Zero-to-negative total
duration will be beneficial for investors in a taper-stricken
Also, expenses ratios of the funds are also lower than the
average expenses charged by the high-yield bond ETFs so some cost
conscious, and taper-focused, bond investors might be interested in
these funds going into the new year (read:
Are Short Term Bond ETFs the New Safe Haven?
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ISHARS-IBX HYCB (HYG): ETF Research Reports
WISDMTR-MLHYBN (HYND): ETF Research Reports
PIMCO-0-5 HY CB (HYS): ETF Research Reports
WISDMTR-MLHYBZ (HYZD): ETF Research Reports
SPDR-BC HY BD (JNK): ETF Research Reports
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