Bank trouble in March reminded income investors that high yields don’t come without risk. But income investors can take some solace from recent signs of moderating fears about the financial system. Consider the ProShares High Yield-Interest Rate Hedged ETF (HYHG) in this environment, advises Martin Fridson, editor of Forbes/Fridson Income Securities Investor.
The key lesson to draw from March’s dramatic events is that high yields in income securities come at a price, namely, periodic jolts from unexpected sources. FDIC-insured savings accounts entail no such anxiety-inducing events, even when a couple of regional banks collapse. But the average yield on those accounts was just 0.37% in March.
To capture the much higher yields available on securities recommended in Income Securities Investor while also limiting the impact of negative surprises, spread your risk not only across issues, but also across asset categories.
As for HYHG, it is an exchange traded index ETF that tracks the Citi High Yield (Treasury Rate-Hedged) Index. The Citi index seeks to mitigate the potential impact of rising interest rates on the performance of high yield bonds. Conversely, the Index limits the positive impact from declining rates.
HYHG offers return from a diversified portfolio of high yield bonds, but targets zero interest rate risk. The fund incorporates a hedge against rising rates, using short positions in U.S. Treasury futures. HYHG is subject to underlying credit risk. Corporate bonds are rated Ba1/BB+ or lower by Moody’s and S&P, respectively, and limited to two issues per issuer.
Single-issue exposure is capped at 2% of the fund. HYHG’s strategy is to invest 80% of its total assets in high yield securities included in the Citi Index. Sector weightings as of 12/31/22 were dominated by Industrial – Service (49.29%), Industrial – Manufacturing (21.51%) and Industrial – Energy (7.99%).
The top five corporate bond positions were Organon 4.125% 04/30/28 (1.92%), AAdvantage Loyalty 5.50% 04/20/26 (1.48%), DISH DBS Corp. 5.25% 12/01/26 (1.43%), United Airlines 4.625% 04/15/29 (1.09%), and Mozart Debt Merger Sub 3.875% 04/01/29 (1.07%).
Distributions are variable, based on HYHG’s underlying holdings, and largely taxed as ordinary income. This ETF is suitable for medium- to high-risk tax-deferred portfolios.
Recommended Action: Buy HYHG at $67 or lower.
Subscribe to Forbes/Fridson Income Securities Investor here...
