HYEM VanEck Emerging Markets High Yield Bond ETF

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 (IHY), the Emerging Markets High Yield Bond ETF (HYEM) and the Fallen Angel High Yield Bond ETF (ANGL). 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 (THHY) 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 notes.

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 ETFs in the Zacks ETF Center).

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 expenses.

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  (read: 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 market.

The other main ETF targeting this market is the First Trust High Yield Long/Short ETF (HYLS). 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 ETF).

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 Eck product.

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 exposure.

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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
 
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