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.
The Funds may be subject to credit risk, interest rate risk and
a greater risk of loss of income and principal than those holding
higher rated securities. As the Funds may invest in securities
denominated in foreign currencies and some of the income received
by the Funds may be in foreign currency, changes in currency
exchange rates may negatively impact the Funds’ returns.
Investments in emerging markets securities are subject to elevated
risks which include, among others, expropriation, confiscatory
taxation, issues with repatriation of investment income,
limitations of foreign ownership, political instability, armed
conflict, and social instability. THHY is subject to risks
associated with investing in high-yield securities; which include a
greater risk of loss of income and principal than funds holding
higher-rated securities, as well as concentration risk; credit
risk; hedging risk; interest rate risk; and short sale risk.
Investors should be willing to accept a high degree of volatility
and the potential of significant loss. The Funds may loan their
securities, which may subject them to additional credit and
counterparty risk. For a more complete description of these and
other risks, please refer to the Funds’ prospectus and summary
prospectus.
The “net asset value” (NAV) of an ETF is determined at the close
of each business day, and represents the dollar value of one share
of the ETF; it is calculated by taking the total assets of an ETF
subtracting total liabilities, and dividing by the total number of
shares outstanding. The NAV is not necessarily the same as an ETF's
intraday trading value. Investors should not expect to buy or sell
shares at NAV. Total returns are based upon closing “market price”
(price) of the ETF on the dates listed.
Fund shares are not individually redeemable and will be issued
and redeemed at their NAV only through certain authorized
broker-dealers in large, specified blocks of shares called
“creation units” and otherwise can be bought and sold only through
exchange trading. Creation units are issued and redeemed
principally in kind. Shares may trade at a premium or discount to
their NAV in the secondary market.
Diversification does not assure a profit nor does it protect
against a loss.
Investing involves substantial risk and high volatility,
including possible loss of principal. Bonds and bond funds will
decrease in value as interest rates rise. An investor should
consider the investment objective, risks, charges and expenses of a
Fund carefully before investing. To obtain a prospectus and summary
prospectus, which contain this and other information, call
888.MKT.VCTR or visit marketvectorsetfs.com. Please read the
prospectus and summary prospectus carefully
before investing.
Van Eck Securities Corporation,
Distributor335 Madison Avenue, New York, NY 1001
MacMillan CommunicationsMike MacMillan/Chris Sullivan,
212-473-4442chris@macmillancom.com
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