DWS has launched a new fixed income ETF in the US providing dynamic risk-controlled exposure to the USD high yield corporate bond market.

The ETF aims to protect against drawdowns by exiting the high yield market during adverse conditions.

The Xtrackers Risk Managed USD High Yield Strategy ETF (HYRM US) has been listed on NYSE Arca.

The fund is linked to the Adaptive Wealth Strategies Risk Managed High Yield Index which was developed by the indexing arm of registered investment adviser NorthCrest Asset Management.

The index is independently calculated and maintained by Frankfurt-based Solactive.

The strategy uses a daily algorithm to dynamically adjust exposure between US dollar-denominated high yield corporate bonds (delivered through investing in DWS’s own broad market high yield corporate bond ETFs) and cash equivalent investments (represented by the Solactive Fed Funds Effective Rate Total Return Index).

It is designed to fully track the high yield corporate bond market during normal market conditions while switching fully to the US dollar cash position when two quantitative risk signals both indicate adverse market conditions.

The strategy’s end goal is to remain invested in high yield bonds as much as possible, achieve a low tracking error relative to the broad market, and provide significant downside protection when needed.

The two quantitative risk signals are the z-score of the CBOE Volatility Index (VIX), a measure of expected future volatility in US large-cap stocks, and the z-score of the Moving Average Convergence Divergence (MACD), a short-term momentum indicator designed to quickly identify changing trends in the high yield bond market.

When the VIX rises two standard deviations above its mean, and the MACD falls more than one standard deviation below its mean, the strategy will exit the high yield exposure. NorthCrest notes that equities tend to sell off first (higher VIX) before bonds are impacted as the latter is higher in the capital structure. The firm, therefore, believes that the combination of MACD on high yield and volatility on equities acts as a perfect marriage for detecting risk-on or risk-off environments.

Once a signal is given, it remains in place for a minimum of ten days in order to avoid the whipsawing effect of trend changes and the high costs associated with frequent trading.

The ETF comes with an expense ratio of 0.30% which includes the cost of investing in DWS’s broad market high yield corporate bond ETFs.

Michael Curtis, Head of US Passive Product at DWS, commented: “HYRM may be an interesting way for investors to gain exposure to the USD high yield bond market with a built-in risk-management process. Downside, or drawdown risks, are a key factor when allocating to high yield bonds, which the allocation mechanism of HYRM’s underlying index seeks to address effectively.”

Patrick Bobbins, Vice President of NorthCrest Asset Management, added: “We are excited to see the continued development of Adaptive Wealth Strategies Indexes into the fixed income markets. We appreciate the opportunity to partner with DWS Xtrackers on this risk-managed high yield strategy and bring our third index to market.”