3 Reasons To Underweight High-Yield Debt

November 11, 2014


Taking A Break On High Yield … For Now

The high-yield trade today is exceptionally crowded, and not very rewarding, in our view.

While this asset class has performed admirably over long periods of time, the risk/reward trade-off today is clearly skewed—in favor of issuers or borrowers, and against investors, who are, let’s not forget, the lenders.

While we don’t anticipate a day of reckoning to be imminent, we do feel a cautious approach to high-yield exposure is warranted. Spreads are tight, issue quality is poor, and today’s buyer may not be fully aware of many of the risks lurking in this asset class.

Nottingham has liberally incorporated JNK, as mentioned above, as well as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) and the SPDR Barclays Short Term High Yield Bond ETF (SJNK | B-98) in its asset mix. All three of these ETFs offer broad asset class exposure, are highly liquid and sport reasonable expense ratios.

Earlier this year, we exited the high-yield space in our multi-asset-class strategies, but continue to maintain a small exposure in our Global Income strategy.

The recent pullback in high yield put it back on our radar; however, at this point, we would like to see another 100+/- bps of spread-widening before re-engaging. As with all things in investing, timing and careful research are paramount to generating successful outcomes.

With respect to high yield, perhaps the best advice we can give today is caveat emptor.


At the time this article was written, the author’s firm owned positions in HYG, JNK and SJNK.

Nottingham Advisors is an ETF strategist that manages and advises on more than $1 billion in assets for advisors, institutions and individuals. Nottingham has been using ETFs since 2001 and currently offers five unique strategies with focuses on risk-based total return, current income and real return. To learn more, visit www.nottinghamadvisors.com or contact Nottingham directly at 716-633-3800. For all relevant disclosures, please go here.




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