Market Shares New Taper Proof ETF Bond Fund – SHYD
Janet Yellen made her first appearance on Capitol Hill since being sworn in as the new Chairman of the Federal Reserve.
She stuck with the strategy former chairman Ben Bernanke set forth. In short, they will continue to wind down their massive bond buying program known as ‘the taper’.
Not surprisingly, ETF providers are moving quickly to capitalize on the Fed policy.
As the Fed winds down the program, it is expected to drive longer term interest rates higher. This creates problems for bond ETFs that hold long term bonds.
Rising interest rates mean the value of long term bonds with lower interest rates fall in value. However, since the Fed is holding its Fed funds rate near zero for an extended period of time, the shorter term bonds shouldn’t see their values hurt to the same degree as long term bonds.
Market Vectors is one ETF provider that’s looking to spark interest in their ETF as a better way to invest in bonds as the Fed tapers.
They launched the Market Vectors Short High-Yield Municipal Index ETF (SHYD) on January 14th.
SHYD tracks the Barclays Municipal High Yield Short Duration Index. It invests in publicly traded municipal bonds. They are US dollar denominated high yield short-term tax-exempt bonds. All bonds must have a fixed rate, a dated-date after December 31, 1990, and a nominal maturity of 1 to 10 years.
As of December 31, 2013, the index consisted of approximately 1,619 bonds and 497 issuers. The fund’s index, the Barclays Municipal High Yield Short Duration Index, maintains a 75 percent weight in below-investment-grade muni bonds with the remaining percent weighted in Baa/BBB-rated investment-grade bonds.
High yield munis typically offer the highest potential yields in the municipal bond market. The yield averages about 6.7%. And short term munis are only slightly lower at 5.4%.
What’s more, they have low default rates. Since 1970, less than 1% of high yield munis have defaulted.
According to Market Vectors, the yield on SHLD is tax free. In order to get a similar yield on corporate bonds, they need to yield 8.9% to match what top earners would have received for short-term high yield munis.
Here’s the bottom line…
As the Fed continues to taper, interest rates should continue to go up. In this environment, SHYD should deliver competitive yields while reducing sensitivity to rising interest rates.
Good Investing,
Corey Williams
Category: Bond ETFs, ETFs, What's Going On?
