Most Innovative New Income ETFs

January 13, 2014

As the financial landscape changes, new funds offer different investment tools.

It’s hard to imagine that in a universe of 1,546 U.S.-listed ETFs and ETNs, there’s still room for innovation. But innovate is exactly what a handful of ETF issuers did in the past year, bringing to market some problem-solving value propositions to income-oriented investors.

Among the 157 ETFs that were launched in 2013—and the nine new funds that have already come to market in the first month of 2014—there are a few income-focused strategies that provide investors more tools to generate income at a time when Fed monetary policies are making the hunt for yield more difficult.

Below is a list of four of these interesting strategies, not listed in any particular order.

4. Market Vectors Treasury-Hedged High Yield Bond ETF (THHY | D)

THHY tracks a market-cap-weighted index comprising high-yield corporate bonds, while shorting five-year Treasury notes in a strategy that hedges interest-rate risk.

It’s a strategy that essentially offers access to junk-bond yields, while protecting investors from the detrimental impact higher interest rates would have on a bond portfolio. That’s because, by shorting Treasurys, the fund reduces its effective duration, lowering its yield to maturity. The net result is a portfolio that has a weighted average maturity of 1.9 years, but an effective duration of near zero, and a yield to maturity of 4.7 percent currently.

“It’s one of the first products to give investors a portfolio focused solely on credit risk, with an embedded mechanism designed to eliminate duration risk,” said IndexUniverse ETF analyst Paul Baiocchi.

THHY has an annual expense ratio of 0.80 percent, or $80 for each $10,000 invested. The fund has rallied 3 percent since it came to market on March 22, 2013.



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