Amid rising interest rates, bonds of nearly all stripes are being punished in 2022. Owing to their status as risk assets, high yield corporate bonds are no exception.
However, following one of the worst first halves to start a year in recent memory, junk corporate debt may be offering investors some good deals. For those looking to capitalize on those bargains and the accompanying big yields, active management could prove beneficial. Enter the Franklin Liberty High Yield Corporate ETF (FLHY).
The $210.31 million FLHY, which recently turned four years old, attempts to beat the widely followed ICE BofA US High Yield Constrained Index. Corporate credit spreads are soaring, meaning that prices of bonds are declining, but that scenario may belie opportunity with FLHY.
“First, high-yield bonds now live up to their name, providing much higher income, north of 8% on average. Second, the sharp drop in high-grade bond prices may attract a new set of buyers: issuers of the debt themselves,” reported Randall Forsyth for Barron’s.
Specific to FLHY, the Franklin Templeton ETF is proving the benefits of active management in the high yield bond space. Year-to-date, FLHY is beating the largest ETF in this category — an index-based fund — by about 200 basis points.
Alone, that’s impressive, but there’s more to the FLHY story. The ETF sports a 30-day SEC yield of 6.66%, according to issuer data. That compares favorably with some of its passive rivals.
“The flip side is that yields are sharply higher, which means two things, according to several market pros. In addition to substantially larger current income, based on history, investors might look forward to high total returns to offset potential defaults down the road as well as a margin of safety,” according to Barron’s.
As an actively managed fund, FLHY can better capitalize on credit and valuation opportunities while steering clear of the junkiest of the junk-rated space, or those bonds most vulnerable to near-term downgrades.
Additionally, FLHY can more nimbly navigate interest rate risk than a passive competitor. The fund’s average duration is 3.82 years compared to 4.38 years on its benchmark and 4.34 years on the widely followed Markit iBoxx USD Liquid High Yield Index. Duration measures a bond’s sensitivity to changes in interest rates.
FLHY holds 183 bonds, over 83% of which are rated BB or B. None of its components exceed a weight of 1.72%, indicating that single-issuer risk is low within the ETF.
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