Both hedged high yield bond and bank loan strategies can help limit risks associated with a rising interest rate environment, according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs. However, hedged high yield bond strategies outperformed bank loan strategies during 2013’s rising interest rate environment1, spurred on by the summer’s “taper”-focused concerns and the ultimate tapering that took place in December. Rising over 100 basis points each since the beginning of the year, the 5-year and 10-year Treasury yields closed 2013 at 1.75% and 3.04%, respectively. A summary of this concept can be found on the firm’s site at http://www.vaneck.com/library/viewpoint.
“Hedged high yield bonds and leveraged loans both help limit interest rate duration2,” said Rodilosso. “Leveraged loan strategies saw the vast majority of inflows in 2013. But a handful of factors may make the hedged high yield approach worthy of closer consideration if 2014 is going to be a year of rising interest rates.” Factors benefitting hedged high yield bonds over bank loans last year included:
1) Narrowing credit spreads: as seen after September when no action was taken by the Federal Reserve to taper quantitative easing
2) Long high yield bond/short U.S. Treasury positioning: has historically been more responsive to changes in credit spreads than the floating rate mechanism employed by bank loans
3) High yield bonds’ generally longer duration and somewhat stronger call protection: bank loans can re-price and lose appreciation potential when credit markets rally
Rodilosso also pointed out that while bank loans are senior secured and higher in the capital structure than high yield bonds, bank loans tend to be less liquid in secondary trading. Rodilosso went on to note that when credit spreads widen significantly and interest rates fall, hedged high yield bond strategies present a risk of loss and tend to underperform bank loans.
“For investors who value liquidity and who believe rising interest rates are on the way, the hedged high yield bond approach may be worth a closer look.”
Among Market Vectors fixed income ETF offerings is Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM). THHY seeks to track, before fees and expenses, the performance of the Market Vectors US Treasury-Hedged High Yield Bond Index (MVTHHY), an index designed to provide exposure to below investment grade corporate bonds, denominated in U.S. dollars, that are hedged against rising interest rates through the use of Treasury notes. THHY, the first-of-its-kind passively managed US-ETF, is another example of Market Vectors’ commitment to providing relevant and innovative ETFs to investors.
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, and in addition to THHY, currently oversees Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), International High Yield Bond ETF (NYSE Arca: IHY®), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAGTM), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL®) and Renminbi Bond ETF (NYSE Arca: CHLC®). As of November 30, 2013 the total assets for these ETFs amounted to approximately $1.4 billion.
1Hedged high yield bonds are represented by the Market Vectors US Treasury-Hedged High Yield Bond Index, which outperformed bank loan strategies, as represented by the S&P/LSTA U.S. Leveraged Loan 100 Index, since the former’s inception date of February 5, 2013.
2Duration measures a bond's sensitivity to interest rate changes that reflects the change in a bond's price given a change in yield.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $22.5 billion in assets under management, making it the seventh largest ETP family in the U.S. and 10th largest worldwide as of November 30, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.
Index returns assume the reinvestment of all income and do not reflect any management fees or brokerage expenses associated with Fund returns. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses.
Market Vectors® US Treasury-Hedged High Yield Bond Index is designed to provide exposure to below investment grade corporate bonds, denominated in U.S. dollars that are, through the use of Treasury notes, hedged against rising interest rates.
S&P/LSTA U.S. Leveraged Loan 100 Index seeks to mirror the market-weighted performance of the largest institutional leveraged loans as determined by criteria based upon market weightings, spreads, and interest payments.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
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