PHILADELPHIA — At a time when many financial advisers think that investors should stay away from high-yield bonds because they are too risky, along come two high-yield products that investors can use to hedge some of that risk.
Rydex Investments of Rockville, Md., last Monday launched the Rydex Inverse High Yield Strategy Fund, giving investors the ability to take advantage of rising credit default rates.
And on April 11,
Barclays Global Investors of San Francisco launched the iShares iBoxx $ High Yield Corporate Bond Fund. That is the first exchange traded fund to invest in high-yield bonds, and because it trades throughout the day like a stock, it can be shorted by investors betting against high yield.
But as much as advisers don’t like the idea of investing in high-yield bonds right now, because they are trading at tight spreads to Treasuries, few appear willing to suggest shorting
Barclays’ new ETF or buying into the new Rydex fund.
Although spreads are tight, there is no telling when they will widen, causing high-yield-bond prices to drop, said Marvin Appel, chief executive of Appel Asset Management Corp. in Great Neck, N.Y.
Timing is pivotal
Investors could lose a significant amount of money if they move at the wrong time to short the Barclays ETF or invest in the Rydex fund, he said
Mr. Appel asked: Why take the risk?
“We’ll just move to cash if our models tell us the markets are in trouble,” he said.
That seems reasonable, said Sonya Morris, editor of Morningstar ETFInvestor, a newsletter published by Morningstar Inc. of Chicago.
“People have been saying the high-yield spreads are tight … but they have been saying it for a long time, and it hasn’t reversed yet,” she said.
Of course, those investors willing to short the new Barclays ETF, and those willing to invest in the new Rydex fund, are most likely active traders, according to Harold Evensky, president of Coral Gables, Fla.-based Evensky & Katz Wealth Management.
For those investors, the products may hold some value, he said.
Because of procedural reasons, it may be harder for some investors to short the Barclays ETF, Mr. Evensky said.
But “I can conceive of the high-yield inverse fund being attractive,” he said.
Up to this point, however, such funds haven’t been very successful at gathering assets.
The Access Flex Bear High Yield Bond Fund, which was launched by ProFund Advisors LLC of Bethesda, Md., in April 2005, isn’t well known, having attracted just $230 million.
And the Direxion High Yield Bear Fund, launched last July, has just $62 million in assets. It is part of the Boston-based Direxion Funds group and is advised by New York-based Rafferty Asset Management LLC.
But the Access Flex Bear Fund will likely attract more assets, because many investors think that high-yield spreads will rise, according to Michael Sapir, chief executive of ProFund Advisors.
‘Short’ plays
While it is possible that some investors may short ETFs as a way to hedge against such a move, more will likely turn to mutual funds such as his, he said.
“Shorting can be a very complicated process. Some accounts can’t go short, such as IRA accounts,” Mr. Sapir said.
“Some investors also have to pay a
margin call,” he said. “It can be a difficult process.”
It can also be more difficult to short an ETF if it invests in a relatively illiquid part of the market, said Kevin McGovern, Rydex’s mutual fund business manager.
“There’s a whole host of operational concerns,” he said.
But that hasn’t stopped Barclays from playing up the fact that its newest ETF can be shorted.
“IShares ETFs can be shorted on a down-tick, making them a valuable risk management tool,” Lee Kranefuss, chief executive of Barclays intermediary and ETF business, said in a statement that heralded the launch of the high-yield-bond offering.
