A High-Yielding Alternative in a Low-Yielding World

 

global-globe-ssRegular readers of my commentaries are well aware of the preference I have for investing in individual bonds rather than bond funds.   With that said, I recognize that every investor is unlikely to be comfortable with each aspect of investing. In my case, I am uncomfortable initiating positions in individual bonds with ratings below single-B. Additionally, I have only a moderate level of comfort initiating positions in bonds with single-B ratings. Hence, should a bond fund exist that offers high yields, short duration, and focuses on the part of the ratings spectrum in which I am less comfortable, that would be a fund I would be interested in owning. Lo and behold, such a bond fund exists—the actively managed AdvisorShares Peritus High Yield ETF, ticker HYLD.

To see a list of high yielding CDs go here.

This high-yield bond fund, which recently surpassed $1 billion in assets under management, focuses on single-B and triple-C rated corporates, with slightly more than half its assets currently in B and B-minus rated bonds. Furthermore, HYLD recently had 80 holdings across 22 industries, a duration of just 2.39 years, and a 12-month yield of 7.48% (income over the last 12 months divided by the fund’s recent NAV). Also important to note is that HYLD has the ability to commit up to 10% of its capital toward equities, and that the fund has exposure to term loans. Based on what I am looking for in a bond fund, the ability to allocate money to equities is a negative and the exposure to term loans a positive.

Why don’t I own HYLD at this time? In a nutshell, corporate spreads are simply not attractive enough. The following charts illustrate my point:

june91

 

june12

Both single-B and CCC-or-below corporate bond spreads are currently at levels I would deem unattractive.  As the charts illustrate, spreads have certainly been lower in the past.  But in order for me to purchase a non-defined-maturity product consisting mostly of bonds in today’s historically-low-yielding fixed income markets, I need to have more protection than a duration of 2.39 years and a 7.48% yield.  This is especially true considering investors can currently find higher-yielding (and perhaps less risky) opportunities than HYLD in the commercial real estate space.

As I’ve written about in prior commentaries, opportunity cost is something investors should always consider when deciding whether to wait to initiate a position.  I am patiently waiting for the right time to trade out of some of my higher-quality bonds and roll the funds into HYLD.  That moment has yet to arrive.  But because the funds I hope to one day put to work in HYLD are currently earning respectable yields elsewhere, the opportunity cost of waiting is not as great as it would be if I were planning to put new money to work.  Keep this in mind if you are an investor interested in HYLD and looking for a place to park currently-idle cash.

More from The Financial Lexicon:

The 5 Fundamentals of Building a Retirement Portfolio

Options Strategies Every Investor Should Know

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