As is being widely documented this year, advisors face a challenging environment in which to generate income for clients.
One of the old standbys on that front is high-yield corporate bonds, which are enjoying some good times this year. In many regards, 2021 is proving to be an ideal time to consider credit opportunities despite credit spreads being low.
The U.S. economy is performing admirably. S&P 500 member firms are flush with cash and default rates are low. Combine that with low interest rates and it's a fine time to evaluate high-yield corporate bond strategies. It's also probably a good time to go beyond cookie-cutter junk bond funds and consider more unique concepts, including the TrimTabs Donoghue Forlines Tactical High Yield ETF (CBOE:DFHY).
DFHY tracks the TrimTabs Donoghue Forlines Tactical High Yield Index and it does fit the bill as a unique and more importantly, useful, high-yield credit idea.
DFHY Secret Sauce
Many of the passively managed junk bond funds advisors are most familiar with are pure beta products, but there are some that stray into more original methodologies. DFHY is one, but this case, “unique” shouldn't be conflated with “cause for concern.”
“DFHY aims to capture the majority of the upside and more importantly avoid the majority of the downside of the high yield asset class during a full credit market cycle,” according to TrimTabs Asset Management.
One way of thinking of DFHY is that it offers low volatility the right way. Typically, accessing lower levels of volatility means accepting less in the way of returns, but DFHY aims to not put that trade-off on the table.
Indeed, offering clients a lower volatility high-yield mousetrap to clients is a potentially compelling proposition because junk bonds are historically among the more volatile corners of the fixed income space. Over the past three years, the annualized volatility on the widely followed Markit iBoxx USD Liquid High Yield Index is 520 basis points higher than that of the Bloomberg Barclays US Aggregate Bond Index.
DFHY efficiently accomplishes the objective of being less turbulent than traditional junk bond far. The TrimTabs ETF is structured as a fund of funds, meaning its holdings are other ETFs and some of those funds are investment-grade credit and Treasury products.
DFHY: When Being Tactical Matters
Relative to pure beta junk bond funds, DFHY is tactical – a trait to be prized in the current fixed income climate.
“The flexibility to seek out long-term relative value and short-term tactical trades across the full range of credit markets has so far been a key source of incremental return opportunities in an environment of rapidly rising Treasury yields and spreads grinding tighter. We think this is likely to continue as long as investors assume that central banks stand ready to keep a cap on investment-grade yields,” according to Neuberger Berman.
And with yields low across the bond spectrum, DFHY's lower risk approach to income is all the more relevant to clients today.
“Corporations weathered the storm last year and have positioned themselves really well,” said Collin Martin, fixed income strategist at Charles Schwab, in an interview with CNBC. “Couple that with yield-starved investors going into anything and everything that offer better than a 0% yield, and it’s really the perfect storm to see spreads drop to those pre-financial crisis levels.”
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