VCIT Vanguard Intermediate Term Corporate Bond

AdvisorShares, the Maryland-based ETF issuer leading the active ETFs space, continues its expansion of innovative products in accordance with the small investment firms.

The issuer has rolled out AdvisorShares YieldPro ETF (YPRO) providing investors a new play in the high yield space with enhanced protection from volatility. Its latest foray into the space comes from The Elements Financial Group, which is acting as the portfolio manager for YPRO. The latest addition raises the existing active ETFs line-up to 24 (read: PIMCO Files for More Active ETFs).

YPRO in Focus

The new ETF is a fund of funds that looks to offer investors current income and capital appreciation by investing in both long and short positions across a variety of fixed income ETFs or other income producing ETFs.

In the portfolio construction of YPRO, the manager will pursue attractive yield and handle volatility through a quantitative approach to risk budgeting, which also includes the use of options to hedge residual equity and interest rate risk when needed. Due to this unique selection of bond ETFs, the fund seeks to provide diversification benefits across multiple fixed income segments.

Currently, this strategy produces a well-diversified fund of funds that has long positions in over two dozen ETFs. Top three holdings, at the time of writing, include PowerShares Preferred Portfolio (PGX), Peritus High Yield ETF (HYLD) and Vanguard Intermediate-Term Corporate Bond ETF (VCIT) with 15.04%, 13.84% and 12.45% share, respectively (read: HYLD: The Best Choice Among High Yield Bond ETFs?).

Investors should note that the fund has a somewhat-high expense ratio when compared to index funds as the net expense comes in at 1.42%.

How does this fit in a portfolio?

The new product appears an interesting choice for investors seeking yield maximization in the current low interest environment while targeting a lower level of risk. This is because YPRO’s unique combination of risk budgeting and hedging provides less volatility, high flexibility and low correlations to the equity market.  

With modest tapering underway, a cushion against rising rates has become necessary. With the launch of YPRO, investors could smartly manage interest rate risk given the fund’s innovative approach and risk-adjusted returns with competitive yields (read: 3 Bond ETFs Surging as Interest Rates Tumble).

Competition

Though this new actively managed ETF of ETFs does not have any direct competitor due to its unique long and short strategy, it might still face tough competition from several products available in the high yield space.

The most popular is iShares iBoxx $ High Yield Corporate Bond ETF (HYG) that has accumulated nearly $13.8 billion and charges 50 bps in fees a year from investors. The fund has average maturity and effective duration of 4.23 years and 3.90 years, respectively.

Another product is SPDR Barclays Capital High Yield Bond ETF (JNK), which has $10.4 million in AUM and 0.40% in expense ratio. The ETF targets intermediate end of the yield curve with average maturity of 6.65 years and modified average duration of 4.08 years.   

Apart from these, First Trust High Yield Long/Short ETF (HYLS) could pose a strong obstacle to the new entrant. This fund seeks to provide a high level of income while reducing the interest rate risk to some extent (see: all High Yield ETFs here).

HYLS intends to maintain both long and short positions – long positions in high-yield debt securities, including U.S. and non-U.S. corporate debt obligations, bank loans and convertible bonds, and short positions in high yield U.S. Treasuries and corporate bonds. The fund charges 1.28% in annual fees.

Bottom Line

The new ETF from AdvisorShares could see big inflows if it can manage to generate stronger yields than the other choices. Though the cost of the product is bit expensive, it is probably far less than the ‘traditional’ hedge funds. However, active management and need to understand the fund’s insight might restrict volume levels at the initial stage, suggesting wide bid ask spreads.

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ISHARS-IBX HYCB (HYG): ETF Research Reports
 
PERITUS-HIGH YL (HYLD): ETF Research Reports
 
FT-TAC HI YLD (HYLS): ETF Research Reports
 
SPDR-BC HY BD (JNK): ETF Research Reports
 
PWRSH-PFD PORT (PGX): ETF Research Reports
 
VANGD-IT CRP BD (VCIT): ETF Research Reports
 
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