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.
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 investment plans.
Amid such a backdrop, WisdomTree came up with two launches in the high-yield space in the name of WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund- HYZD and WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund- HYND.
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.
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.