Income ETFs For Yield Starved Investors [Advisorshares Trust, Market Vectors ETF Trust]

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May 23, 2014 3:33pm NYSE:ANGL NYSE:HYLD

yieldAs the year started with no pause in the QE wind down, market participants had feared a rise in interest rates sooner or later. In fact, the Fed also hinted at hiking short-term interest rates sometime next year, but pared down its comment later.

However, proving all wrong, the market has been displaying a totally different trend of late and interest rates have actually plummeted even with reduced Fed bond buying.

Last year, yields on the 10-year treasury hit the 3% mark while the same type of note saw yields decline to a low of 2.52% as of May 16, 2014. Heightened volatility in the U.S. stock markets, massive sell-off in momentum stocks and a bout of downbeat economic data can be blamed for this trend reversal.

As a result, yield-hungry investors once again started looking for high yield investment propositions.  Needless to say, this tendency has sent the high-yield bond ETFs back on track.

Below, we highlight three high-yielding bond ETF choices which have been yielding 4% or more, have seen strong YTD gains and are benefiting from the tumbling rates across the market. Any of these funds could be an interesting choice for investors who believe that the appeal for high yield in the fixed income market will stay alive in the near term:

Peritus High Yield ETF (NYSEARCA:HYLD)

This fund is actively managed and seeks to provide capital appreciation in addition to high yields. It offers low interest rate risk to investors in the high yield space by investing in corporate bonds with a lower effective duration of roughly 2.42 years. In terms of credit quality, HYLD focuses on low-investment grade bonds (B+ and lower) and holds about 77 securities.

The product is extremely spread out across each sector and security, as no single bond accounts for more than 2.04% of the assets. Oil & Gas is the main sector in the fund with about 22% invested in it. The ETF has amassed $1 billion in its asset base so far and trades in moderate volume (read: HYLD: Crushing the High Yield ETF Competition).

Though HYLD is a bit pricey charging 1.25% in expenses, it has proven itself over many other bond choices, gaining 4.67% year-to-date. Further, the ETF has a high annual yield of about 7.57% per annum while the 30-day SEC yield is greater at 7.93%.

However, though the fund has been a winner in the recent past, its long-term outlook is not so bright given the extreme volatility expected in the shorter-end of the curve, especially when the Fed finishes its monetary stimulus. Investors should be hawk-eyed while playing with the product.

Market Vectors Fallen Angel ETF (NYSEARCA:ANGL)

This innovative fund uses a sampling strategy to track the performance of the BofA Merrill Lynch US Fallen Angel High Yield Index and focuses on ‘fallen angel’ bonds. Fallen angel bonds are high yield securities that were once investment grade but have fallen from that level and are now trading as junk bonds.

This 97-securities portfolio is widely spread across the holdings with financial as a top sector followed by communications (19.1%) and basic materials (13.6%). The fund has a modified duration of 5.27 years thus calling for moderate interest rate risk.

Additionally, the product mainly comprises BB and B rated corporates, which together make up for more than 85% of the asset base. The product has about 62% tilt in the U.S. while Europe accounts for about 34% of the product. The fund is well-diversified across its individual holdings.

The ETF trades in paltry volumes and charges a relatively low fee of 40 bps per year from investors. It has accumulated just $16.7 million in AUM and added 5.81% so far this year. It yields 5.35% per annum, while it has a 30-day SEC yield of 4.27% (read: QE Tapering Could Make These Bond ETFs Winners).

Market Vectors International High Yield Bond ETF (NYSEARCA:IHY)

Investors seeking to diversify their portfolio beyond the domestic border can invest in IHY. This product follows the BofA Merrill Lynch Global ex-US Issuers High Yield Constrained Index, holding 404 securities in the basket.
It targets the medium-term corporate bonds with maturity of 6.46 years and effective duration of 3.59 years.  Mainly low-investment grade BB and B rated corporate bonds rule the portfolio with about 88% focus.

Europe has been the main focus of this product with the U.K. being the top spot (10.3%) trailed by Italy (9.7%) and France (9.2%). The low interest rate environment prevailing in Europe will also support the bond prices apart from meeting the yield requirement of investors.

With AUM of $160.8 million, the product puts more focus on the financial sector with 29% share but does not invest more than 1.20% in any single bond. The fund charges 40 bps in fees per year while volume is light which in turn leads to wide bid-ask spread and high trading costs.

The ETF has an attractive yield of 6.26% annually and a 30-day SEC yield of 4.48%. Further, the fund has added 3.73% so far this year. However, the product carries currency translation risk.

Bottom Line

Just remember that all of these bond ETFs are junk in nature and so bear higher default risk. Also, a rise in interest rates in the U.S. will make for adverse conditions in the general bond investing world. However, until that time, the aforementioned bond ETFs look to remain in focus.

With dual strength – higher return and some market-beating yields – these ETFs might attract enough investors’ attention, especially of those who have a strong stomach for risks, but a desire for big yields as well.

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