Dividend-News

High-Yield ETFs Miss The Boat, Again

Published Mon, 27 Jun 2016 16:07:21 -0400 on Seeking Alpha

High-yield exchange-traded funds (ETFs) struggled last year, in part because energy bonds took a beating when oil prices fell. Does that make an ETF that avoids energy bonds a good idea? We don't think so.
At least one asset manager recently launched an ETF that invests in every high-yield sector except energy. The idea is to limit the risk of losses and default associated with low oil prices, which can make it hard for oil and gas companies to service their debt.
That may sound appealing to investors whose portfolios were hurt by plunging commodity prices in 2014 and 2015. But we think the approach is a short-sighted one.
Fighting the Last War
It's often said that generals embarking on a new war tend to use the tactics and strategies of the last one. In a similar vein, investors who run away from the entire energy sector today are reacting to the last crisis, not putting themselves in position to avoid the next one.
This is a familiar story. After the global financial crisis, credit investors avoided debt from financial companies, only to miss a sharp rally as the sector recovered.
Likewise, had an ex energy high-yield ETF existed at the start of the year, investors who bought it might be kicking themselves today. Why? Because oil prices-and many high-yield energy bonds-have rebounded sharply over the last few months.
The Problem with ETFs
A single-minded focus on the energy sector misses an even larger point... Read more