DWS launches market timing junk bond ETF
DWS is launching another junk bond ETF, this time incorporating market timing.
The Xtrackers Risk Managed USD High Yield Strategy ETF (HYRM) will jump back and forth between cash and junk bonds based on how safe the market is. It does this by tracking the Adaptive Wealth Strategies Risk Managed High Yield Index.
The index is made up of two sub-indexes:
1. Solactive USD High Yield Corporates Total Market Index
2. Solactive Fed Funds Effective Rate Total Return Index.
The way it works is that a computer programme looks at VIX, the volatility index, and MACD, which measures the momentum of securities prices. If either VIX or MACD gives a bearish signal, the fund sells all its bonds and just tracks the cash index. Conversely, when VIX is low and the market is safe, the fund swaps to junk bonds.
Importantly, HYRM doesn’t buy junk bonds directly. Instead it buys them through the Xtrackers USD High Yield Corporate Bond ETF (HYLB).
Junk bond are a popular product line for DWS. It offers six such ETFs with approximately $7.5 billion in assets.
HYRM charges 0.30%.
Bernie’s commentary – a client asked for it?
Often the way bond ETF launches work is that a client – like a big European pension fund – approaches an ETF issuer and asks them to bring it out. This makes them different from a lot of equity ETFs which target the mass of retail investors and often need to be heavily marketed. So I guess the first question here is: who is the client? Is there one?
The next question for me at least is the investment strategy. Selling junk bonds when VIX is high, buying when VIX is low sounds like a losing strategy to me. I’d have thought the opposite would be better: when VIX is high, time to buy. And when VIX is low, time to go. Buy the dip; buy fear.
The final question I’d have is why the fund buys DWS’s other ETF rather than junk bonds directly. I suspect this is due to liquidity. The median junk bond trades once every six weeks according to TRACE. Meaning that discounts in volatile markets are inevitable. I guess that’s DWS’s reason.