Shares Magazine - August 22, 2019

EXCHANGE-TRADED FUNDS

 | SHARES | 22 August 2019

for holding the bond, is higher

than other bonds or shares, so

it provides that extra level of

reassurance for investors.

Wood says, ‘High yield bonds

had a bad rep from the 80s,

but it’s quite a mature market

now. And if an issuer defaults,

bondholders get paid before

common stockholders. There

may be a haircut to it, but you

ƐƟůůŐĞƚƚŚĞĐŽƵƉŽŶƚŽŽ͛͘

REMEMBER THE RISKS

However, one of the world’s

biggest players in the ETF space,

Vanguard, is not as keen and

believes higher quality bonds,

called investment grade, might

be best for investors looking to

ĂĚĚĮdžĞĚŝŶĐŽŵĞ͕ŝ͘Ğ͘ďŽŶĚƐ͕ƚŽ

ƚŚĞŝƌƉŽƌƞŽůŝŽ͘

James Norton, a senior

investment planner at Vanguard,

ƐĂLJƐ͕͚dŚĞƉƌŝŵĂƌLJƌŽůĞŽĨĮdžĞĚ

ŝŶĐŽŵĞŝŶĂƉŽƌƞŽůŝŽŝƐƚŽƌĞĚƵĐĞ

ƌŝƐŬ͘,ŝŐŚƋƵĂůŝƚLJĮdžĞĚŝŶĐŽŵĞ

tends to perform well when

ĞƋƵŝƟĞƐƉĞƌĨŽƌŵďĂĚůLJ͕ĂĐƟŶŐĂƐ

ĂďƵīĞƌŝŶĨĂůůŝŶŐŵĂƌŬĞƚƐ͘

͚,ŝŐŚLJŝĞůĚĮdžĞĚŝŶĐŽŵĞŝƐ

further up the risk spectrum

and has more equity like

ĐŚĂƌĂĐƚĞƌŝƐƟĐďŽƚŚŝŶƚĞƌŵƐŽĨ

risk and return.

‘So in periods when markets

are falling investors should not

expect high yield to protect them

in the same way higher quality

government bonds, but rather

bonds issued by companies,

known as corporate bonds,

ĂŶĚĂůǁĂLJƐŚĂǀĞĂĐƌĞĚŝƚƌĂƟŶŐ

below BBB.

As always with anything

that’s not so easy to invest in

otherwise, exchange-traded

funds (ETFs) provide an

accessible way to add high yield

ďŽŶĚƐƚŽLJŽƵƌƉŽƌƞŽůŝŽ͘

BMO’s head of ETF

management for EMEA, Terry

Wood, says the returns on high

yield bonds tend to be similar to

ƐŚĂƌĞƐďƵƚǁŝƚŚůŽǁĞƌǀŽůĂƟůŝƚLJ͘

This is because while shares

and high yield bonds react in a

similar way to market events,

when it comes to the income

side, returns from high yield

ďŽŶĚƐŚĂǀĞůĞƐƐǀŽůĂƟůŝƚLJ

because the yield investors

get from the coupon, i.e. the

regular payments investors get

We look at how to track these fixed-income instruments through ETFs

Could high yield

bonds be an answer

to market volatility?

B

ŽŶĚƐĂƌĞŽŌĞŶƐĞĞŶ

ĂƐĂŶĂŶƐǁĞƌĂƚƟŵĞƐ

of market stress and,

with the FTSE 100 losing more

than 6% of its value since the

beginning of August there is

plenty of reason for people to be

seeking safe havens.

But the trouble is everyone has

this idea, which means yields on

the so-called ‘safest bonds’, such

as government ones like some

shorter-dated US Treasuries

and UK Gilts, have now turned

ŶĞŐĂƟǀĞ͘/ŶŽƚŚĞƌǁŽƌĚƐ͕LJŽƵ͛ƌĞ

paying the government for the

privilege of giving them money.

HIGH YIELD BONDS

THROUGH ETFS

One way to avoid this scenario,

ĂŶĚƚŽƐƟůůŐĞƚƉŽƚĞŶƟĂůůLJůĞƐƐ

risk than shares, is through high

yield bonds.

These tend not to be