As 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.