Bond investments have hardly seen gains in 2013 thanks to taper concerns. However, across the spectrum, the high-yield bond space has been less ruffled, with most losing marginally in the YTD frame.

The ‘Fed Taper’ and ‘rising rates’ normally go hand in hand. Ending all speculations throughout the year, the Fed has now initiated a modest tapering of $10 billion and could complete the process by the end of 2014, if economic growth remains in line with their expectations (also see QE Tapering Could Make These Bond ETFs Winners ).

While a rock-bottom interest rate environment prevailing in the U.S. currently will excite investors to go for a high-yield option in 2014, a continued taper threat is bound to come in the way of investment plans.

Amid such a backdrop, WisdomTree came up with two launches in the high-yield space in the name of WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund- HYZD and WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund — HYND.

HYZD & HYND in Focus

These new ETFs were launched on December 18. While HYZD looks to track the BofA Merrill Lynch 0-5 Year US High Yield Constrained, Zero Duration Index, HYND tracks the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Negative Seven Duration Index.

These indexes are a combination of the long and short portfolio. The ‘long portfolio’ replicates the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index for both the funds. It exposes the U.S.-domiciled non-investment grade corporate debt securities with maturity of less than five years (see all the junk bond ETFs here ).

The distinction lies in the short portfolio of the indexes. For HYZD, the index holds the short positions in U.S. Treasuries that seeks to match up the duration of the long portfolio, with a targeted total duration exposure of about zero years.

But for HYND, the short portfolio of the index surpasses the duration of the long portfolio, thus resulting in a targeted total duration exposure of nearly negative seven years.

The funds hold about 7% in cash and the debt securities having BBB or lower graded bonds. Investors should also note that the products carry default risks since these do not posses very high credit ratings. HYZD charges investors 43 bps in annual fees while HYND costs 48 bps.

How do these fit in a portfolio?

Investors who are looking for a fixed-income play thanks to the low interest rate environment should consider these products. These have been designed to counter interest rate risks in bond investing.

With the modest tapering slated to take place in January and with more of it being in the cards, a cushion against rising rates became necessary through an inverse exposure to treasuries (read: 3 Bond ETFs Popular in the ‘No Taper’ Aftermath ).

Its zero/negative total duration profile will allay interest rate risks. Also, the Fed has vowed to keep the interest rate low for longer, irrespective of the taper.  This should keep the high-yield bond investing alive in 2014.

Lastly, high yield bonds behave nicely in a trending economy. Hence, the more strength the U.S. economy is gaining, the greater is the number of high-yield bond funds offered by the issuers.

Competition

The high-yield or junk bond space is stuffed with various products from numerous issuers.  Some of the popular names are iShares iBoxx $ High Yield Corporate Bond ETF ( HYG ), SPDR Barclays Capital High Yield Bond ETF ( JNK ) and PIMCO 0-5 Year High Yield Corporate Bond Index Fund ( HYS ).

Therefore, in order to show up in the space, HYZD and HYND will have to promote their short portfolio nature which sets both apart from most of the other products. Zero-to-negative total duration will be beneficial for investors in a taper-stricken environment.

 Also, expenses ratios of the funds are also lower than the average expenses charged by the high-yield bond ETFs so some cost conscious, and taper-focused, bond investors might be interested in these funds going into the new year (read: Are Short Term Bond ETFs the New Safe Haven? ).   

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