Van Eck Global, the New York-based fund provider behind the Market Vectors ETFs, has rolled out the Market Vectors Treasury-Hedged High Yield Bond ETF (THHY). The fund seeks to exploit the income potential of below investment-grade US corporate bonds in low interest-rate environments, but hedges the interest rate risk through the use of Treasury notes. In other words, it’s an attempt to give a purer exposure to credit risk while hedging interest rate risk.
THHY follows the Market Vectors US Treasury-Hedged High Yield Bond Index (MVTHHY), an in-house index that follows a long-short strategy and invests in dollar-denominated, junk corporate bonds, while shorting Treasury notes to hedge against adverse interest rate movements.
Since bond yields and prices move in opposite directions, if interest rates rise back to normal levels, price of high-yield “junk” bonds will fall while profits from the short position in Treasuries will rise, thus offsetting the price decline in junk bonds.
To qualify for inclusion in the index, corporate bonds, including callable ones, must have a below-investment-grade rating (based on the average ratings of S&P, Moody’s and/or Fitch) with a minimum amount outstanding of $500 million, a fixed coupon schedule and at least one year remaining to maturity.
The Index’s short positions are made up of current five-year US Treasury notes in the equivalent long high-yield positions and are rebalanced every month. The short portfolio is reconstituted on a quarterly basis where the US Treasury note closest to maturity is liquidated and the most recently issued five-year US Treasury note is sold short. Also, the short portfolio holds four equally-weighted short positions in the current five-year US Treasury note issued each of the last four quarter ends.
THHY normally invests 80 percent of total assets in securities that comprise the fund’s benchmark index. Since the index comprised of 686 below investment-grade bonds from 373 issuers and because of the practical difficulties and the expenses involved, the fund uses a sampling methodology and aims to achieve a correlation of 95 percent or more with the index. As of 28th February 2013, the index was concentrated in the industrials sector with 80.3 percent of total assets allocated to the sector. Constituents of the long portfolio are modified market-capitalization weighted and individual issuers are capped at 3 percent of total assets.
The fund has an annual expense ratio of 1.45 percent, which includes 45 basis points in management fees, 95 basis points in interests on securities sold short and 11 basis points in other expenses.
These are high costs indeed, and this newcomer will have to perform well over time to make up for these expenses. It’s not a fund I would own right now, but I will revisit it again at some point in the future when sufficient price data is available, which will assist in making a better decision.
Disclosure: No holdingsContact Ulli