HYLD: Bond ETF Active Star—For Now

August 27, 2013

1. Active manager success can be fleeting and rather unpredictable.

Prior to 2013, over rolling one-year holding periods, HYLD beat out the Barclays High Yield Index just seven times out of 269, or just 3 percent of the time. In 2013, the story is much different, with HYLD outperforming more than half the time.

Admittedly, this performance comparison is a bit unfair since there aren’t any funds that track the entire high-yield bond space. The over-the-counter trading of bonds forces even marketlike index funds to make compromises.

High-yield bond ETF stalwarts like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) track constrained versions of broad high-yield indexes that screen for liquidity.

However, comparing HYLD’s performance to HYG and JNK shows a similar trend of underperformance prior to 2013 and an outperformance year-to-date.

In fact, this year’s outperformance has been startling: HYLD beat HYG and JNK over rolling one-year holding periods 97.5 percent of the time.

2. High-yield bonds are called junk bonds for a reason: They’re speculative.

While corporations have benefited from the lower interest rates and are as flush as ever with cash, their need to roll short-term high-yield debt in a rising-rate environment can change repayment prospects in a hurry.

While avoiding interest-rate risk and focusing on credit remain in favor, HYLD’s forays into the junkier parts of high yield will likely benefit investors.

However, fund holders must have faith in the fund manager’s ability to time the potential head winds that high-yield bonds may face from the uncertainty surrounding continued corporate profitability and the unwinding of the Fed’s quantitative easing operations.

 

Will HYLD continue to shine bright or fizzle out like so many other active strategies?

The fund’s recent run suggests that an active approach may be the way to navigate the turbulent times to come. However, the skeptic in me finds it hard to believe that the fund will continue to live up to its high price tag.


At the time this article was written, the author held no positions in the securities mentioned. Contact Gene Koyfman at [email protected].


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