In the current environment of ultra-low rates, yield-starved investors continue to search for products with higher levels of income. A number of new products have been launched in the ETF universe in order to cater to such investors, including an actively managed preferred share ETF by First Trust—Preferred Securities & Income (FPE), an ETF investing in business development companies—Market Vectors BDC Income ETF (BIZD), three MLP ETFs—Global X Junior MLP ETF (MLPJ), iPath S&P MLP ETN (IMLP) and and Yorkville High Income Infrastructure MLP ETF (YMLI), a Put Write ETF—US Equity High Volatility Put Write Index Fund (HVPW) and an actively managed global corporate bond ETF by WisdomTree (GLCB)
Many investors have poured a lot of money into high yield bond funds in the last couple of years but since there are concerns that the interest rates may start going up later this year or next year, some of the investors are looking for products that can provide at least hedge against the interest rate risk. (Read: 3 Excellent ETFs for Income Investors)
The new actively managed ETF following long/short strategy from First Trust is another product targeting yield starved investors. The product seeks to provide higher level of income by investing in high yield bonds but at the same time reducing the interest rate risk to some extent.
The First Trust High Yield Long/Short ETF (HYLS) was listed on NASDAQ on February 27, 2013.
FPE in Focus
HYLS seeks to provide current income by investing primarily in a diversified portfolio of below-investment-grade or unrated high-yield debt securities, including U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds. (Read: ALPS Launches New Income ETFs)
According to the filing, the fund will invest up to 80% of its net assets in junk securities. Further, the fund may invest up to 10% of its net assets in non-U.S. securities denominated in non-US currencies. The fund intends to maintain both long and short positions—long positions in securities that the ETF advisor believe have the potential to outperform the fund’s benchmark Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index and short position in securities expected to underperform the index.
Further, according to First Trust, since the historical correlation between high-yield securities and traditional fixed-income instruments is low, the addition of high-yield securities to a well-diversified portfolio has the potential to improve returns and reduce overall portfolio due to diversification befits. (Read: Time for Inverse Bond ETFs)