First Trust Advisors, the Illinois-based provider of exchange traded funds (ETFs), has unveiled the First Trust High Yield Long/Short ETF (HYLS), an actively managed high-yield bond ETF designed to provide investors with capital appreciation and current income.
Investors worried about an interest rate hike later this year or next year, can consider this product for hedge against interest rate risk. Furthermore, due to the low historical correlation between high-yield securities and traditional fixed-income instruments, addition of high-yield securities to a well-diversified portfolio may lower overall risk and improve returns.
HYLS tracks the Bank of America Merrill Lynch US High Yield Master II Constrained Index and invests primarily in a diversified portfolio of below investment-grade or unrated debt securities, including US and non-US high-yield bonds, bank loans and convertible bonds.
The fund will invest at least 80 percent of net assets in junk securities. Additionally, it may invest up to 10 percent of net assets in non-US securities in non-US dollar denominated currencies. HYLS can also invest in non-income producing securities including distressed securities (distressed companies face uncertain and troubled conditions and may be involved in reorganizations, restructurings and bankruptcy proceedings) and common stocks though there is a 15 percent cap (upper limit) on investment in distressed securities.
The fund may invest up to 15 percent of its net assets in bank loans, including senior secured, unsecured and subordinated bank loans, loan participations, and unfunded contracts. Additionally, it may also invest in preferred stocks, convertible securities, mortgage-backed securities, illiquid securities and investment companies & other pooled investment vehicles.
To manage its overall credit and duration risk (price fluctuation due to market interest rate movements), the fund may invest in investment-grade corporate debt obligations and government securities. The fund is not constrained by portfolio maturity and may invest in short- , medium- and long-term maturities.
As part of its active investment strategy, the fund intends to maintain both long and short positions – long positions in high-yield corporate bonds the advisor believes has the potential to outperform the fund’s benchmark and short positions in US Treasuries and corporate bonds the advisor believes may decline in value or underperform the underlying index.
HYLS’ long position may total up to 130 percent of net assets while short positions will range between zero percent and 30 percent. Investors should note short-selling of securities is equivalent to leverage/borrowing and can amplify profits and losses.
As of the date of this writing, the fund had 73 holdings in its well-diversified portfolio with the top ten holding accounting for about 25 percent of total assets. The fund is short on US Treasuries and short-exposure amounts to 24.71 percent of total assets. The fund’s weighted average maturity of long-positions was 6.72 years while the weighted-average effective duration of long-positions was 3.93 years when launched on Feb. 27.
The fund has an annual expense ratio of 1.19 percent. Generally, I don’t think much of L/S combinations in equitye ETF/Mutual funds, so I will be watching how HYLS plays out as it matures over time, which should give us a better idea as to the validity of the set up.
Disclosure: No holdings
Contact Ulli