Eric Dutram: Market Vectors, the ETF arm of Van Eck Global, has been at the forefront of bond product innovation over the past few months. The firm recently debuted an international high yield fund (NYSEARCA:IHY) and also launched a first of its kind ‘fallen angel’ high yield bond ETF (NYSEARCA:ANGL) as well.
Clearly the firm is expanding its lineup of fixed income ETFs in an effort to capture some of the incredible asset growth that the bond market has seen in year-to-date terms. In fact, more than a dozen bond ETFs have seen more than $1 billion in inflows over the past year, further cementing the space’s role in investor portfolios despite growing fears of a bond bubble down the road (see Three Bond ETFs for a Fixed Income Bear Market).
With this backdrop and investors’ never ending desire for yield, the firm is branching further into the junk bond segments with its latest SEC filing. In this document, the company revealed the initial plans for the Defaulted & Distressed Bond ETF. While many details were not yet available—such as expense ratio or ticker symbol—we have highlighted some of the key points below:
The proposed ETF looks to follow the Altman Defaulted & Distressed Bond Index a benchmark of defaulted bonds and distressed bonds that trade at no less than a 10% spread (yield to worst) over a comparable Treasury security. Qualifying securities must have a below investment grade rating from an average of the three major agencies, but the bonds can be from both American and non-U.S. issuers (read 3 Actively Managed Bond ETFs for Stability and Income).
The ETF looks to target securities that have at least one year remaining until maturity, a fixed coupon schedule, and it will utilize a modified market cap approach (5% cap). The fund will also seek to target distressed bonds with roughly 50%-80% of the portfolio and the remained to distressed bonds, depending on various market factors and conditions.
With this focus it seems possible that the fund could be a yield king in the fixed income world, although the overall volatility and risk levels for a fund of distressed and defaulted bonds could be rather high as well. Investors will have to balance out the need for income with the risks that are likely to come with this product, although it should be pointed out that this will be, if ever approved, a lower risk way to target the space than by buying single securities (see HYEM: The Best Choice in Junk Bond ETFs?).
As of right now, there really aren’t any direct competitors to the proposed fixed income ETF from Van Eck. With that being said, there are a number of other junk bond-centric ETFs that could act as some level of competition, especially for investors who will not be able to stomach the intense risk level that will likely come with Van Eck’s product.
In addition to the roughly two dozen junk bond ETFs on the market, such as HYG or JNK, there are a number of other high yield high risk sectors which could also face off against Van Eck’s proposed fund. These include any number of ETFs in the mREIT market (NYSEARCA:MORL), the BDC world (NYSEARCA:BDCL), or even the Closed End Fund ETF market (see Closed End ETFs for Forgotten 7% Yield?).
Still, Van Eck’s product will have to clear a number of regulatory hurdles before reaching the market, so some time could go by before it is available to trade. However, if the fund does pass these tests, it could be an interesting, albeit high risk, complement to investor portfolios seeking more yield in today’s income starved environment.
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