The high yield ETF response to higher rates
More ETF i nvest or s want to reduce t he sensitivity of their portfolios to interest rates as monetary policy tightens, says Michael Cooke, Head of Exchange Traded Funds at Mackenzie Investments. The US central bank raised its benchmark rate t wice in recent months and could announce more hikes this year. So investors can lower the interest- rate sensitivity of their portfolios by i ncluding shorter- duration or higher- yielding assets classes, such as high yield bonds.
“These f i xed- i ncome assets are more diff icult to access and relatively complex so they lend themselves more to actively- managed ETFs,” says Mr. Cooke.
Act i ve management i nvolves rigorous credit research to assess t he profitability and solvency of issuers, paired with an evaluation of the appropriate yield to compensate for the credit risk. There is also an ability to be tactical in managing sector and security exposures against an evolving macroeconomic backdrop. “Controlling the cost of i nvesting is increasingly important to Canadians, which has led t hem to cost- efficient ETFs,” says Mr. Cooke. “When you combine t he structural benefits of ETFs with the value provided by active management in a diversified fixed- income ETF, you have a compelling solution.”
By historical standards, yields on traditional government bonds are low. In this environment, high yield bonds have garnered increased investor interest, as they tend to have lower credit ratings than investment- grade bonds but pay a higher yield for that credit risk. They also tend to exhibit a low correlation to traditional fixed-income securities. This creates the potential for portfolio diversification and more attractive r i sk- adjusted returns.
Mackenzie is responding to investor demand by launching the Mackenzie Global High Yield Fixed Income ETF ( MHYB). This active ETF invests primarily in higher yielding f i xed- income securities issued by companies around the world. MHYB is t he newest addition to Mackenzie’s suite of active fixed- income ETFs, desig ned to generate income, enhance diversification and manage risk.
“Mackenzie is always innovating to give ETF investors and their advisors more choices for income solutions as market conditions change so rapidly,” says Mr. Cooke. “Our objectives include helping deliver a higher- yielding outcome for investors.”
Faced with the prospects of a tighter interest rate cycle, ETF investors can respond by tapping t he value of active management and product innovation. Active fixed income ETFs can provide solutions for generating i ncome, managing risk and reducing a portfolio’s sensitivity to higher interest rates. Commissions, management fees, brokerage fees and expenses all may be associated with Exchange Traded Fund investments. Please read the prospectus before investing. Exchange Traded Funds are not guaranteed, their values change frequently and past performance may not be repeated.