Stockchase Opinions

Paul Tepsich BMO HighYield Corp Bond US Hedge to CAD ETF ZHY-T COMMENT Apr 25, 2016

Probably a good way to get exposure to the high-yield market, because it is extremely opaque. He currently has around a 10% weight in high-yield debt in his private client portfolios. High-yield in general has a strong risk adjusted return over a 5, 10, 20 year timeframe as an asset class.

$13.860

Stock price when the opinion was issued

E.T.F.'s
It's the ideal tool to help you make quicker, more informed decisions for managing and tracking your investments.

You might be interested:

SELL

Don’t invest in it because it is ‘high yield’. You are investing in the worst companies that have not defaulted yet. There is more risk in these bonds. When the economy turns down, these companies will struggle. It will trade like equities. He thinks markets are much closer to a top than a bottom.

DON'T BUY

ZEF-T vs. ZHY-T. The question is credit risk. You have emerging market risk with ZEF-T and so you get extra yield. When you do the correlation of the higher yield, they trade more like an equity than a bond. ZEF-T is an equity type risk, where as ZHY-T is more like fixed income. He does not think it is the time to step into either of these.

COMMENT

Which fund would you recommend for high-yield bonds? You are always dealing with US bonds in this. He would probably look at the ZHY as well as the XHY. You have to remember that you are not getting the same premium for high-yield that you used to. He would rather buy a Covered Call. He is not a big fan of high-yield stuff.

DON'T BUY
ZJK-T vs. ZHY-T. High yield is a sexy name for junk bonds. They are the worst quality bonds. In a downturn these companies will not be able to pay back their bond holders first. If equities fall 20%, high yield bonds fall 13%. There is more risk for a portfolio.
COMMENT
High yield bonds are an equity part of your portfolio even though they pay a dividend. It is a basket of the worst quality balance sheets in corporate North America. It is very high risk from a price perspective. The realized default rate even in the great recession was about 10% or so. So when the bonds do go bad, it is about 10% of the companies that are affected. So long as you think about it as an equity-like risk, then he has no issue with it. He has no issue with holding it indefinitely. This one is hedged to the Canadian dollar.
COMMENT
In his TFSA for income. The prinicipal should be there upon maturity of each bond unless the issuer is in trouble. If the ETF is actively managed, this impact should be minimal. ZHY is exposed to the USD. The bond yields have been an attractive 5-6%. This trades like a stock, containing equity-like holdings. High-yield bonds are the basket of the worst corporations with poor balance sheets. The growth part of a TFSA should not be investing for yield. Hard to say if ZHY is appropriate in this context. But in a bear market, you'll lose 20% of value here.
SHORT
Strategy to hold this forever in a TFSA and RRIF and bought it for the yield. Will this strategy continue to work? It's not actively managed, but tracks a high-yield index. If there's a default, the ETF would kick out that bond. A massive credit bubble is building, and ZHY is a basket of the worst-quality bonds which pays a higher yield. The 5-6% yield is attractive, but this gives you equity-like exposure, so in a downtown this will fall hard, like 25-30%. However, it won't drop as far as market indices.
BUY ON WEAKNESS
Strategically the US high yield market and investment grade markets have been competing closely on yields. He is waiting to see better yields in the high yield space. It may take another year to go. The rates are just too low to go into at this time given the higher risk of default. He would be a buyer on a substantial sell off.
COMMENT

ZFH is exposure to short-term high yield credit using a swap strategy to mitigate the interest rate risk. You still get credit risk. ZHY trade more like equities than bonds. People are seeking the higher yields. A floating rate note mitigates the interest rate risk only.