Industry Updates

Lyxor's high hopes for high yield

Scott Longley

Lxyor is launching two new high yield bond ETFs aimed at satisfying demand in an investment area which is becoming more mainstream as investors seek higher returns against the backdrop of potentially rising interest rates.

The Lyxor BofAML $ Short Term High Yield Bond UCITS ETF and the Lyxor BofAML € Short Term High Yield Bond UCITS ETF are the latest additions to the providers range of income funds alongside the two equity income ETFs launched in late June.

The new funds have total expense ratios (TERs) of 0.30%.

Adam Laird, head of ETF strategy for northern Europe at Lyxor, said the target market for the new funds was investors who needed a higher yield and were willing to take on board the extra risk to achieve their aim.

"For a long time high-yield bonds were considered a specialist asset class, but we've seen they're now becoming more commonplace," he said. "So we would see this as being a supplementary holding in a balanced income portfolio."

He pointed out that high yield bonds current offered a return of around 5%, far higher than that of investment grade bond ETFs, and suggested they are more suited for an environment where interest rates were potentially on the rise.

"These bonds have lower duration, which means they are less vulnerable in a rising rate environment," he added.In recent weeks the US Federal Reserve, the European Central Bank and the Bank of England have all indicated more hawkish language when talking about potentially tightening monetary policy.Laird said that for the US dollar ETF, Lyxor uses the BofA Merrill Lynch BB-CCC 1-3Y US Developed Markets High Yield index. Among the rules of the index are that bonds must be rated between BB through to CCC, there must be at least 18 months-plus to final maturity at issuance, and with between one to three years to final maturity as of the rebalancing date. Additionally, the bonds must be fixed coupons with a minimum amount outstanding of $250m and with no emerging market constituents.

The ETF follows 248 bonds with an overall duration of 1.6 years. "It's currently the only high yield US dollar bond ETF with one to three-year exposure," said Laird. "That means it's got lower duration than its peers."

The Euro-denominated fund tracks the BofA Merrill Lynch BB-CCC 1-3 Year Euro Developed Markets High Yield Constrained index. It similarly consists of the same criteria of the US dollar version and follows 93 bonds overall duration of 1.7 years. Issuers within the US index are capped at 2% while Euro index issuers are capped at 3% to maintain diversification with the portfolio.

Laird said the Euro ETF was the only fund on its index. "Once again the duration and TER are lower than peers," he added.

Lyxor is also offering a hedge against a strengthening Euro with monthly hedged version of the US dollar product. That comes with a TER of 0.40%.

Lyxor is the second largest provider in Europe for Fixed Income ETFs with over €13.9bn in assets under management. The company said that across the high-yield ETF market a total of €1.3bn in new assets had been added in this year.

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