Seeking Alpha
Active ETFs
Profile| Send Message|
( followers)  

Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisor to the AdvisorShares Peritus High Yield ETF (NYSEARCA:HYLD), compares the high yield and equity markets.

We have seen the cracks begin to emerge in the equity story over the past week. Earnings are beginning to come in and so far have been a disappointment. The retail sector is showing signs that Q4 was weaker than originally expected, with store cuts announced by, Sears, J.C. Penney, and Macy's and job cuts at Target. Emerging markets have been roiled this week, with Argentina shifting policy, likely devaluing their currency, and other currencies plunging. China surprised on Thursday with their purchasing manager's index showing a contraction. How quickly the tables have turned so far in 2014. After posting a 30% return (on the S&P 500 index) in 2013, we have seen a 3% hit so far this year.

This equity reaction is not any surprise to us. The Shiller P/E ratio now stands near 25, a level which has been breached only four times in the last 100 years.1

As we look forward, we see little in way of catalysts for equities to continue to rise in 2014, and so far, this is proving to be the case. Cost cutting has played its course and now we are left with minimal top line growth. Unemployment remains elevated and it has been a painfully slow recovery, with economic data going in fits and starts of improving and then weakening again. While there may be selective opportunities for stock pickers to make money, we believe that by and large the beta trade in equities will not be there in the year ahead. What is there to drive equity prices going forward?

The perception among investors often seems to be that the only place to get a real return is in the equity markets. However, history has clearly proved otherwise. In fact, looking over the past 5 and 15 years, the high yield market has actually outperformed equities on a pure return basis and over the past 25 years, has performed relatively close to equities but with nearly half the risk, for a clear risk adjusted outperformance by high yield bonds.2

(click to enlarge)

It should also be noted that while high yield bonds are perceived as "risky" by some, they rank higher on the capital structure than equities, meaning that if something were to go wrong with the company, the bondholders are among the first to get paid, while the equity holders are last in line.

We have likened the equity market before to a casino: in many cases, you are rolling the dice with a purchase, hoping that someone will pay more for it later. In the high yield bond market we benefit from the fact that we have a set maturity date at which we are paid back par value for the bonds and during the holding period, we are promised semi-annual coupon payments, so are able to generate tangible yield.3 With equities, there is no obligation to make any sort of dividend payment and you could be left waiting a lot longer than you intended for others to agree with you on the value of the stock and for the price to appreciate.

We look at the equity game as largely just that…a game. It seems to us that on a risk adjusted basis, the high yield market offers a much more compelling prospect for investors. This often overlooked and misunderstood asset class deserves some attention.

1 Source: Data sourced from http://www.multpl.com/shiller-pe/.
2 Source: Credit Suisse High Yield Index data from Credit Suisse. S&P 500 numbers based on total returns via Bloomberg. Calculations based on monthly returns and standard deviation is calculated by annualizing monthly returns.
3 This assumes that bond does not default or undertake any sort of restructuring prior to maturity.

Source: The Equity 'Game'

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com.