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Under The Hood Of SPDR Barclays High Yield Bond ETF

By John Gabriel For strategic, long-term exposure to U.S. high-yield bonds, investors may consider SPDR Barclays High Yield Bond ETF (NYSEARCA: JNK ) as a small core holding. The fund can also serve as a tactical investment for the satellite portion of a diversified portfolio. Investors should bear in mind that high-yield bonds are one of the most volatile sectors of the fixed-income market. Long-term-minded investors looking to JNK as a strategic position are likely to find the diversification benefits of high-yield bonds attractive. High-yield bonds tend to be negatively correlated (or uncorrelated) with government and aggregate bond portfolios, which often make up the bulk of most investors’ fixed-income exposure. Moreover, high-yield bonds are poised to hold up relatively well in the event of rising interest rates and inflation. While rising rates and inflation tend to be the enemy of typical fixed-income securities, the high-yield bond asset class tends to outperform its fixed-income peers during such periods thanks to its stocklike returns and heavier dependence on business fundamentals. Consider that over the past 10 years, U.S. high-yield bonds have shown positive correlation (74%) with the S&P 500, while the Barclays U.S. Aggregate Bond Index has been relatively uncorrelated (26%) over the same period. Remember, interest rates will typically rise when the economy is in good shape and businesses are performing well. High-yield bonds tend to perform well when issuers’ fundamentals are strong or improving (and vice versa). Tactical investors may look to a fund like JNK as a way to bolster income in a yield-starved environment. However, investors should not look at the fund’s yield in isolation. Rather, the current yield should be viewed in relation to the yield offered by U.S. Treasuries with the same maturity. The difference between the two is what is known as the credit spread, and it represents the premium that investors can collect for assuming additional credit risk. The credit spread should also be viewed relative to the expected default rate. According to Moody’s, since 1983 the historical average default rate for high-yield bonds is 4.8%. In the trailing 12-month period through October 2014, the U.S. high-yield default rate was 2.4%, relatively flat from a year ago. Rising default rates typically result in widening credit spreads. But default rates are expected to remain low (around 2%) thanks to favorable credit conditions. Fundamental View The U.S. high-yield bond market has evolved over the past few decades. Whereas in the 1970s the overwhelming majority of high-yield bonds were so-called “fallen angels” (bonds issued by companies that had their credit ratings downgraded from investment-grade to high-yield status), today there is a vibrant and healthy market for new-issue high-yield bonds. According to SIFMA, in 2014, new issuance of high-yield bonds in the United States was $278 billion through October, slightly below the $285 billion sold in 2013 in the same period. By comparison, high-yield issuance averaged $95 billion per year from 1999 to 2009. Many investors may find the significant income potential of U.S. high-yield bonds attractive, particularly in the current low-yield environment. Their income potential is a primary point of appeal that attracts investors to the high-yield corporate-bond market. Indeed, there are very few other investments that offer high- to mid-single-digit yield potential in the current market environment. But other factors to consider include the asset class’ diversification benefits as well as its ability to withstand the impact of rising interest rates, potential inflation, and an uptick in the instance of default. U.S. high-yield bonds offer a favorable risk/reward profile relative to other major asset classes thanks to their equitylike returns with significantly less volatility. Owing to its generous yield, the Bank of America Merrill Lynch High Yield Master II Index (the generally accepted benchmark for the asset class) generated an annualized total return of 7.6% over the past 15 years. This compares to a total return of about 4.6% for the S&P 500. But the BofAML HY Master II Index’s annual standard deviation over that period was 9.9%, compared with 15.3% for the S&P 500. Adding a stake in high-yield bonds to complement aggregate bond exposure can help improve a portfolio’s diversification benefits. In fact, over the past five years, high-yield bonds have been uncorrelated (12%) with the Barclays U.S. Aggregate Bond Index. The asset class’s lack of correlation with investment-grade bonds and its negative correlation with government bonds should be an advantage when we finally see the inevitable rise in interest rates and potentially higher inflation. Of course, these advantages don’t come without risk. This economically sensitive asset class fell more than 32% in 2008 when the markets were roiled by the global credit crisis. Steady inflows from yield-starved investors have helped drive prices higher. The current option-adjusted credit spread between the BofAML HY Master II Index and U.S. Treasuries is about 4.4%. For some context, consider that the long-term average credit spread is about 6%. The all-time low of around 2.5% occurred in June 2007, while the all-time high occurred in December 2008 at the height of the credit crisis when the spread briefly spiked up to more than 20%. Fitch expects U.S. high-yield default rates will remain low through 2015 thanks to accommodative funding conditions and a recovering economy. Moreover, many of the highest risk issuers have taken advantage of favorable credit markets in recent years to extend their lifelines. Portfolio Construction This fund seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Barclays Capital High Yield Very Liquid Index. The index includes publicly issued U.S. dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year. The fund uses a representative sampling strategy to track the index and currently has nearly 800 holdings. Its sector exposure is extremely concentrated, as industrials make up 89% of the portfolio. The financials sector makes up roughly 8%, while utilities round out the portfolio at about 4% of the benchmark. Issues rated BB and B make up 40% and 43% of the index, respectively. The remaining 17% is made up of issues rated CCC or lower. Currently, the fund’s modified adjusted duration is 4.38 years, and its weighted average yield to maturity is 6.39%. Fees This fund charges an expense ratio of 0.40% per annum. While this is quite a bit higher than those levied by funds tracking an aggregate bond index, it is cheap compared with actively managed funds in the same category. High-yield bonds tend to be more illiquid than investment-grade corporate bonds, which can make them comparatively expensive to trade. With an estimated holding cost of 0.72%, JNK reflects the challenges of employing a sampling strategy to track a relatively illiquid benchmark. Transaction costs explain the difference between the fund’s expense ratio and its estimated holding cost. Alternatives The closest alternative to JNK is iShares iBoxx $ High Yield Corporate Bond (NYSEARCA: HYG ) , which has a slightly higher expense ratio of 0.50% but a lower estimated holding cost of just 0.18%. HYG tracks the Markit iBoxx USD Liquid High Yield Index and also employs a representative sampling strategy. It currently has nearly 900 holdings and is much more diversified than JNK in terms of sector exposure. At 4.12 years, it has a slightly shorter duration than JNK. It also has a lower average yield to maturity of 5.59%. Another alternative for investors to consider is PowerShares Fundamental High Yield Corporate Bond ETF (NYSEARCA: PHB ) , which charges a 0.50% expense ratio. PHB seeks to outperform its cap-weighted peers by tracking a fundamental index developed by Research Affiliates, LLC. Investors concerned about the health of the economy and future default rates may favor PowerShares’ PHB, as its benchmark avoids the riskiest issuers (excludes issues rated below B). PHB has a comparable duration of 4.37 years, and its higher-quality portfolio offers a slightly lower yield to maturity of 5.05%. Investors concerned about the impact of rising interest rates may consider SPDR Barclays Short Term High Yield Bond ETF (NYSEARCA: SJNK ) or PIMCO 0-5 Year High Yield Corporate Bond ETF (NYSEARCA: HYS ) , which charge expense ratios of 0.40% and 0.55%, respectively. SJNK currently has a modified duration of 2.4 years, and its yield to maturity is 6.41%. HYS has a slightly lower duration of 1.96 years and currently offers an estimated yield to maturity of 5.47%. Disclosure: Morningstar, Inc. licenses its indexes to institutions for a variety of reasons, including the creation of investment products and the benchmarking of existing products. When licensing indexes for the creation or benchmarking of investment products, Morningstar receives fees that are mainly based on fund assets under management. As of Sept. 30, 2012, AlphaPro Management, BlackRock Asset Management, First Asset, First Trust, Invesco, Merrill Lynch, Northern Trust, Nuveen, and Van Eck license one or more Morningstar indexes for this purpose. These investment products are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in any investment product based on or benchmarked against a Morningstar index.

A Top-Ranked India ETF To Tap The Growing Consumer Sector

The Indian stock market has hardly looked back from the astounding journey it set forth on in May 2014 following the formation of the new government. Most economic factors are presently in favor of Asia’s third-largest economy, including the revival of the currency, a drastic fall in inflation thanks mainly to the oil price crash and an improvement in current account deficit. India’s wholesale price inflation – which was an acute concern leading to a series of rate hikes in the past couple of years – plunged to a five-year low in September. Though India’s Q3 GDP growth rate of 5.3% was not great, analysts from HSBC expect over 6% growth rate from this nation next year. This is noteworthy since the nation’s bourses suffered a lot last year as foreign investors remained skittish about putting more capital in the nation, leaving many questions about the potential of the country in the near term. Actually, given that India isn’t a commodity-oriented emerging market like its BRIC brothers Brazil or Russia, the nation has immensely benefited from the recent natural resource weakness. If this is not enough, Credit Suisse forecasts that Indian economy will log ‘fastest USD nominal growth in the world’ next year as noted by Reuters. To add to this, Credit Suisse believes that Indian equities are not pricey relative to the nation’s growth outlook. This recent bullish tone did spread cheers across every corner of the Indian economy as evident by at least a 25% return received from each India ETF this year. However, some specific corners need special mention. One such space is the Indian consumer sector. What Drives Consumer Sector Higher? The middle income population in India is mushrooming. This fraction of the population has an inclination to spend on discretionary items like travel and leisure which in turn boosts the sales of consumer products like automobiles and personal goods. For example, auto sales displayed a speedy annual expansion of 10% in November (yoy). Notably, auto sales are often regarded as a well-being of an economy. Lower fuel prices seemed to have done the trick. Moreover, with cooling inflation, many are speculating a rate cut in the coming days, though no such thing has taken place formally as of yet. And if in any case, the interest rate goes down, the auto industry should soar. India basically has a compelling investment proposition with its rising importance as a ‘consumer driven’ economy. As per Indian Brand Equity Foundation (IBEF), the present consumer spending will likely grow two-fold by 2025. The consumer confidence score rose to 126 in Q3 of this year from an all-time low of 92 reached in Q1 of 2010. The market is motivated by favorable demographics and expanding disposable income. IBEF also predicts that per capita income in India will likely see a meaningful CAGR of 5.4% within the span of 2010-2019 with food products and personal care taking about 65% share of the market revenue. Other forecasts by IBEF include doubling of the consumer durables market by FY15 from FY10. The young generation’s inclination toward tech-driven products will also facilitate this growth trajectory. This calls for a bullish stance over the consumer sector of the Indian economy. Here we would like to highlight the Zacks top-ranked ETF providing exposure to this very corner of the Indian market. EGShares India Consumer ETF ( INCO ) has a Zacks ETF Rank #1 (strong Buy) with a Medium risk outlook and we expect it to outperform most of its peers in the coming months meaning it could be an excellent pick for investors seeking more exposure to this economy. INCO in Focus This ETF targets the consumer industry of India and follows the Indxx India Consumer Index. It holds 30 stocks in its basket and has amassed $21.5 million in its asset base. The fund trades in a paltry volume of 15,000 shares, suggesting additional cost in the form of wide bid/ask spread beyond the expense ratio of 0.89%. The fund offers a moderately concentrated bet in the top 10 holdings as indicated by its 52% exposure to these stocks. Among individual holdings, MRF Ltd., Motherson Sumi Systems Ltd. and Bosch Ltd form the top positions of the fund with total investment of 17.7%. The fund allocates 79.42% of its asset base to consumer goods. A small proportion of the asset base has also been assigned to Industrials (15.4%) and Consumer Services (4.8%). Industry-wise, automobiles – which is presently a well-performing sector in India – accounts for 37.5% followed by personal goods (27.14%) and industrial engineering (15.4%). INCO has hit a low of $19.64 and a 52-week high of $34.89. The fund is currently hovering near its 52-week high price and could be an interesting choice in 2015 for investors seeking more Indian market exposure.

Competition Heats Up In The Global Tactical ETF Space

With the launch of the Cambria Global Asset Allocation ETF (NYSEARCA: GAA ), Cambria Funds looks to compete with the AdvisorShares ETF that Cambria previously managed; and with the new zero-management fee alternative mutual fund offered by Aspiration Funds. The Cambria Global Asset Allocation ETF debuted on December 9. The ETF’s objective is to replicate the results of the Cambria Global Asset Allocation Index, which allocates assets across asset classes in pursuit of absolute positive returns. Investing in the new ETF will provide investors with exposure to stocks, bonds, commodities, and currencies, diversified across geographic markets and economic sectors. While Aspiration Funds made headlines with their innovative “name your own price” management fees, the new alternative ETF from Cambria Funds goes even further, with a flat management fee of 0.00% (that’s not a typo). Being an ETF, the new Cambria fund doesn’t charge a 12b-1 fee, either, and its net-expense ratio is just 0.29%. The only catch to the ultra-low fees is that the new ETF invests in other ETFs, some of which are managed by Cambria, and the underlying ETF managers will collect management fees. The Cambria Global Asset Allocation ETF typically invests in other ETPs (exchange-traded products), with roughly 40% of its assets allocated to equities, 40% to fixed-income, and 20% to other asset classes such as commodities and currencies. The goal is to gain diversification benefits through asset allocation, in order to dampen volatility, limit drawdowns, and keep investors in the market, long-term, so that their gains can compound. Cambria Investment Management serves as the new ETF’s investment advisor, and its portfolio managers are Mebane Faber and Eric Richardson. Previously, Cambria managed a similar ETF for AdvisorShares, now known as the AdvisorShares Morgan Creek Global Tactical ETF (NYSEARCA: GTAA ) and managed by Mark Yusko of Morgan Creek Capital. Through December 22, GTAA had gained 4.6% in 2014, but its net-expense ratio of 1.63% is 134 basis points higher than GAA’s. 2015 is shaping up to be a big one for liquid alts, and the competition between these ETFs likely foreshadows many similar showdowns to come. Liquid alts investors, who gain additional investment options and benefit from the downward pressure on fees, have reason to look forward to the New Year. For more information, visit the new fund’s website .