Avoid HYGH ETF for High Yield Bonds due to Interest Rate Risk.

The iShares Interest Rate Hedged High Yield Bond ETF (HYGH) is designed to provide high yield bond exposure while hedging interest rate risk. However, I would recommend avoiding this ETF for three reasons: lack of diversification, high fees, and low returns compared to other bond ETFs. HYGH has a limited investment universe and a high expense ratio, which can negatively impact performance. Additionally, there are other bond ETFs that offer better returns and more diversified portfolios.

The iShares Interest Rate Hedged High Yield Bond ETF (NYSEARCA: HYGH) is designed to provide high yield bond exposure while hedging interest rate risk. However, I would recommend avoiding this ETF for three reasons: lack of diversification, high fees, and low returns compared to other bond ETFs. HYGH has a limited investment universe and a high expense ratio, which can negatively impact performance. Additionally, there are other bond ETFs that offer better returns and more diversified portfolios.

HYGH launched in 2014 and has a net expense ratio of 0.52% [1]. While the fund has delivered solid results historically, its expense ratio is significantly higher than other high yield bond index ETFs such as the SPDR® Portfolio High Yield Bond ETF (SPHY) and the iShares Broad USD High Yield Corporate Bond ETF (USHY), which have expense ratios of 0.05% and 0.08% respectively. HYGH's high expense ratio is primarily driven by its primary holding, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which has an expense ratio of 0.49% [1].

High yield bond credit spreads are currently tight relative to historical norms, with the US High Yield Master II Option-Adjusted Spread at 286 basis points compared to the average credit spread of 426 basis points over the past decade [1]. This tight spread environment limits the potential for price appreciation and increases the risk of spread widening, which could lead to significant downside.

Additionally, interest rate cuts are likely in the near term, with real interest rates remaining elevated and the front end of the yield curve inverted [1]. HYGH's interest rate hedges mean that it will not benefit from a decline in interest rates, unlike traditional high yield bond funds. This could lead to underperformance relative to other high yield funds with interest rate exposure.

HYGH's historical performance has been mixed, with a total return of 62.8% since inception compared to 64.5% for SPHY [1]. While HYGH has outperformed SPHY in recent years, the degree of outperformance was significantly stronger prior to the Fed rate hike cycle which began in 2022.

In conclusion, while HYGH offers interest rate hedging, its high fees, limited diversification, and potential for underperformance in a low interest rate environment make it a less attractive option for investors. There are other bond ETFs that offer better returns and more diversified portfolios, making them a more suitable choice for investors seeking high yield bond exposure.

References:
[1] https://seekingalpha.com/article/4800129-hygh-3-reasons-to-avoid-this-etf