First Trust rolls out high-yield long/short junk bond ETF (HYLS)

Feb 28th, 2013 | By | Category: Fixed Income

First Trust Advisors, a leading provider of exchange-traded funds (ETFs), has launched the First Trust High Yield Long/Short ETF (HYLS), an actively managed bond ETF designed to provide investors with current income and capital appreciation.

First Trust rolls out high-yield long/short ETF (HYLS)

First Trust ‘s new high-yield long/short ETF provides income and capital appreciation, while partly mitigating interest-rate risk.

Listed on the Nasdaq stock market, the fund invests primarily in a diversified portfolio of below-investment-grade or unrated high-yield debt securities (often referred to as junk bonds), including US and non-US corporate debt obligations, bank loans and convertible bonds.

Owing to low correlations, First Trust believes the addition of high-yield securities to a well-diversified portfolio has the potential to enhance overall return and provide diversification benefits while potentially decreasing portfolio volatility.

The current environment appears conducive to the fund’s strategy. Credit fundamentals within high-yield remain strong as a result of the ongoing, albeit modest, economic recovery, relatively strong corporate cash flow generation on the part of issuers and low corporate defaults within the high-yield market.

The fund’s investment approach permits a short component designed to capitalise on investment opportunities in various market environments. The ability to maintain short Treasury positions also enables the fund to isolate a portion of the interest-rate risk from the credit risk inherent in the high-yield securities in the fund’s portfolio.

William Housey, Senior Portfolio Manager at First Trust, said: “At a time when investors are growing concerned about the potential fallout from increasing interest rates on their fixed income portfolios, First Trust is offering investors the opportunity to potentially capitalise on the strength of the high-yield bond market and US corporate credit fundamentals while mitigating a portion of the interest-rate risk.”

In addition to potentially mitigating risk, the long/short strategy may enhance returns via the implementation of the ‘carry trade’, a process whereby a borrowed security is sold and the short seller profits by using the proceeds to purchase another security with a higher interest rate.

Housey added: “Active portfolio management and alternative investment strategies, particularly this fund’s approach to reducing interest-rate risk by adding senior loans and a short Treasury position, may help investors obtain enhanced returns from fixed-income investments in the wake of increasing interest rates.”

The fund has total annual expenses of 1.19%.

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