HYLD: Bond ETF Active Star—For Now

August 27, 2013

In a sparse land of successful active ETFs, the junk fund HYLD is king.

Success stories among actively managed funds are harder and harder to come by, as the recent article by IndexUniverse’s Cinthia Murphy made clear. But as everyone knows, this doesn’t mean active managers can’t outperform the market.

A case in point is the AdvisorShares Peritus High Yield Fund (NYSEArca: HYLD).

Launched in November 2010, the fund is a rare active ETF success story. HYLD has been the second-best-performing fixed-income ETF this year, behind the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB).

And so far, this year has proved quite challenging for bond investors.

The only fixed-income funds delivering returns greater than 1 percent for the year thus far are all high-yield products, with HYLD’s performance making a strong case that it pays to be selective with credit choices.

Indeed, HYLD bears little resemblance to the broad high-yield market. Its approach has been rather straightforward: High yield is all about the credit risk. Thus, the manager has reduced exposure to interest rates, while targeting credits that are expected to continue to deliver a high level of current income.

A comparison of the fund’s portfolio to the Barclays High Yield Index as of June 28, while slightly dated, highlights both strategies.

HYLD has an effective duration of 3.8 compared with an effective duration of 4.4 for the Barclays High Yield Index. This means that for every 1 percent parallel rise in interest rates, the portfolio is expected to fall by roughly 3.8 percent compared with 4.4 percent for the index.

With only 70 bonds in the portfolio compared with roughly 2,000 bonds in the Barclays High Yield Index, however, it’s clear HYLD’s managers have been very selective and haven’t shied away from bonds with higher credit risk.

Compared with the broad market, the fund has substantially more weight allocated to bonds rated below CCC+. Not surprisingly, the portfolio’s option-adjusted spread—the market’s measure of credit risk—is more than 200 basis points higher than that of the index.

Putting that all together brings HYLD’s recent outperformance into focus. Moreover, at a time when yield is hard to come by, HYLD delivers a yield-to-maturity of 9.6 percent versus 6.8 percent for the Barclays High Yield Index.

At first blush, it seems HYLD’s high price tag of 1.35 percent, or $135 for each $10,000 invested, might be worth it.

But before rushing in to make HYLD your core bond holding, there are a few things to keep in mind:


Find your next ETF

Reset All