Ryasik
Investing in corporate credit at this stage of the cycle looks risky to me given that credit spreads are so tight. Having said that, as long as you enter this space by limiting exposure to overpriced and fragile bonds, opportunities still exist.That is Why BNY Mellon High Yield Beta ETF (NYSE: BKHY) is interesting to me. BKHY is a relatively new entrant into the junk bond ETF space, launching its business in April 2020. Despite being a newcomer, BKHY has made significant progress, successfully outperforming some of the more established players in the high-yield market, such as the SPDR® Bloomberg High Yield Bond ETF (Jiangnan).
What differentiates BKHY from its peers is its cost-competitive structure and unique investment approach.It straddles the line between passive and active management, with the goal not to beat but to match high returns The Index uses its proprietary credit model. The model is designed to systematically limit the risk of overpriced or low-quality bonds, thereby mitigating the downside risk associated with volatile high-yield markets.
Unbundling fund holdings
BKHY holds a broad range of bonds, spreading its investments across a large number of individual positions. This broad diversification is a strategic move designed to mitigate the risks associated with investing in high-yield speculative-grade bonds. No position represents more than 0.5% of the fund, making the fund overall very diversified.
bnymellon.com
Industry composition and weight
When we look at the sector exposure of the bond positions themselves, the Consumer and Communications sectors dominate, followed by Energy and Financials. That’s not surprising, given that many consumer-facing debt issuers carry considerable credit risk and offer high yields.
bnymellon.com
As for credit quality, it is mainly concentrated in BB-rated issuers, accounting for more than 50% of the investment portfolio. About 11% of small amounts are considered trash. This is an important consideration as it means there is clearly a risk of default. That said, assuming managers use credit models that correctly weed out mispriced bonds and are well diversified, overall risk may be mitigated.
Bunnie Mellon
Peer Comparison: BKHY vs. Similar ETFs
While BKHY has shown promising performance over its short term, it’s worth comparing it to other similar ETFs to evaluate its relative performance. The SPDR® Bloomberg High Yield Bond ETF (JNK) is one of the most popular ETFs for investing in junk bonds. BKHY has outperformed the market, and the price ratio of BKHY to JNK currently looks to continue moving higher.
tradingview.com
Pros and Cons of Investing in BKHY Theme Tracks
BKHY tracks the high-yield speculative-grade bond market, a theme that is not without its pros and cons.
advantage
1. High returns: As the name suggests, high-yield bonds have higher interest rates than investment-grade bonds, potentially resulting in higher returns for investors. The current yield is the highest we’ve seen in a while, at 8.82%, according to YCharts.
ycharts.com
2. Diversification: Investing in BKHY allows investors to diversify their investment portfolio, thereby reducing overall portfolio risk.
shortcoming
- high risk: High-yield bonds, also known as junk bonds, are rated below investment grade, indicating a higher risk of default. I’m still very concerned about credit spreads here, but my timing was wrong as well. So this is more of a macro call to me. Hopefully, the fund’s screening process will reduce this risk overall.
- Interest Rate Risk: High-yield bonds are sensitive to changes in interest rates. As interest rates rise, bond prices typically fall, which can result in losses for investors. Having said that, the duration is only 3.15 years, so it’s not as sensitive as other bond funds.
Conclusion: To invest or not to invest?
While BKHY’s 0.22% cost-competitive structure and broad diversification may appeal to some investors, its holdings of risky speculative bonds may be a deterrent to risk-averse investors. As mentioned, this is more of a circularity issue for me. I think this is a good fund and I like the screening and low duration characteristics it brings to the table. It’s just a matter of when is the right time to start a new position.
