Active US High Yield: A new frontier for ETFs

KEY POINTS
ETF product innovation is rapidly expanding horizons for ETF investors.
There could be a compelling case for using active fixed income ETFs to expose portfolios to the potentially attractive yields on offer across high yield bond markets.
Active US High Yield ETFs may offer investors access to higher income and lower volatility than equities through companies whose fundamentals, overall, remain attractive.

Traditionally the domain of passive equity investing, today’s ETF market offers far more choice than ever before. Thanks to exciting product innovations in recent years, ETF investors can now enjoy access to many areas of the investment spectrum, while maintaining the potential benefits of an ETF structure.  In particular, fixed income ETFs saw record net sales over 2023 of $305.9 bn, while active/semi-active ETFs enjoyed estimated net inflows of $136.2bn over the calendar year.1

In our view, the expansion of the ETF product line into previously untapped areas does not replace more traditional uses of ETFs such as indexed equity, but rather compliments this by offering exposure to a broader opportunity set within a diversified portfolio. For example, high yield (‘HY’) corporate bonds are less well-known than equities in the ETF space. However, they can work just as well for ETF investors as a diversifying tool offering potentially higher income and lower volatility than equities.

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The role of US high yield in portfolios

Fixed income has long provided a crucial role in any balanced portfolio. HY bonds are considered to carry a higher default risk than government or investment grade corporate debt (or credit), but to compensate for this, they offer the potential for higher rates of income. 

The HY bond market was born in the US and that remains the largest and most liquid market offering a diverse opportunity set. Importantly, diversification doesn’t just come from issuer sectors and industries, but also from credit rating and maturity, meaning a high yield portfolio has access to multiple levers from which to aim to generate alpha. This is why active management could be worth considering, especially in an environment where the policy, growth and inflation outlook remains so uncertain.

Despite this uncertainty, a healthy US economy is providing a favourable fundamental and technical backdrop for high yield bonds. US corporate credit fundamentals are in fairly good shape, and the high yield default rate is relatively benign. Furthermore, valuations from a yield perspective appear compelling and offer a potential buying opportunity.

Against this backdrop, the US HY market has the potential to deliver an attractive total return over the coming 12 months, driven by coupon income. This could be of considerable interest to ETF investors looking for ideas to deploy the elevated cash levels built up over the past couple of years as we get closer to a potential US rate cut, even if the timeline is difficult to predict.

At a time where ETF investors are increasingly crying out for more innovative options to access the attractive opportunities across the fixed income landscape, active US High Yield ETFs may provide another compelling option in the investor toolkit. 

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    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

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