Launch Date: November 30, 2010
HYLD is an actively-managed ETF that aims to generate high current income with capital appreciation being a secondary goal. The fund achieves this through investments in high yield debt securities which provide good yields on principal. The fund is sub-advised by Peritus Asset Management which takes a “value-based, active credit approach” to selecting investments in the high yield market. The managers intentionally avoid the new issue market and focus on finding opportunities in the secondary market. The managers also have the flexibility to utilize US Treasuries as a way to hedge the portfolio during times of market stress.
As of March 20th, the portfolio was very well diversified across sectors with allocations to high yield bonds across 20 sectors in all. The largest allocation was a 14% weight to the Oil & Gas sector. The largest allocation to an individual bond was 5.22% to United Refining bond maturing in 2018, yielding 10.5%. Given the generally higher yields within the junk bond space, it doesn’t come as a surprise that the SEC yield is high at 7.44%. The average duration of the fund was about 3 years.
Peritus Asset Management serves as the sub-advisor to HYLD. The portfolio managers making the day-to-day decisions are:
Timothy Gramatovich, Chief Investment Officer – Mr. Gramatovich is the co-founder of Peritus and has been involved in the high yield space for 25 years.
Ronald Heller, CEO & Senior Portfolio Manager – Mr. Heller is the co-founder of Peritus and oversees the portfolio management and trading activities.
Net Expense Ratio – 1.35% (with a fee waiver of 0.02%)
Market Cap – $23.4 million
Average Daily Volume – 5,515 shares
What’s special about it?
1. There are already several index ETFs that provide investors with passive exposure to the high yield space, such as the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK). However, HYLD will be the first ETF to provide exposure through an actively-managed fund. The high yield space is definitely one where there is a lot of potential value add that can be derived through active management, given the wide disparity in credit quality amongst issuers.
2. Having the ability to increase allocation to US Treasuries also provides the fund managers with a tool to manage downside risk. High yield bonds are definitely one of the riskier and more volatile asset classes which tends to get hit hard during market downturns. In those situations, having the ability to reduce exposure to the high yield space in an active fund can be crucial.
The Active Bear ETF has only been on the market for 4 months, a period too short to make a fair assessment of an active manager. The fund is benchmarked to the Barclays US High Yield Index. The 4 month performance chart below compares the market price performance of HYLD to its index counterparts, HYG and JNK, which provide passive exposure to the high yield space. Taking the yield component into account, HYLD has a 30-day SEC yield of 7.44%, compared to 6.31% for HYG and 6.56% for JNK.
The prospectus provides a longer performance history for a composite of funds that are managed by Peritus according to a mandate similar to HYLD. The Peritus High Yield Composite, as of Dec 31, 2009, had returned 85% over the previous 1 year, while the Barclays Capital US High Yield Index returned 58%. Since inception in 2000, the composite has returned 10.38% versus 8.21% for the index.
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- As mentioned, the ability to apply discretion to the selection of high yield bonds is quite valuable in this space as the credit quality of junk bond issuers can vary significantly. As such, holding a portfolio supported by some credit research would appear to better off than having exposure to every bond in an high yield index. In the case of HYLD, the benefits of active management seem to show up in the fund’s outperformance.
- The portfolio still has a relatively short performance history and given that the fund only launched in Nov 2010, investors do not yet have a sense of how the managers and the portfolio will perform in more difficult market environments when high yield bonds tend to suffer the most.
- The daily trading volume in HYLD and the current asset base of $23 million is not very encouraging for new investors. Investors do not need to worry about significant price impact if they want to trade a large block of shares, since the ETF’s market maker has the ability to create or redeem shares. However, due to the low volume, investors might face a higher than normal bid-ask spread.
Disclosure: No positions in above-mentioned names.
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