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Seeking High-Yield Potential in a Tight-Spread World? Think Active ETFs.
Key Takeaways
- Economic good news, solid fundamentals and a favorable supply and demand are supporting high-yield prices and keeping credit spreads tight.
- Tight spreads have tended to stay that way for a while, so investors who remain on the sidelines could be passing up attractive income and return potential.
- We think active management is key—investors seeking to navigate the high-yield market should consider the AB High Yield ETF (NYSE: HYFI).
High-Yield Spreads Are Tight Because of Good News
The biggest reason for tight spreads is good economic news—sustained growth has reduced the possibility of a recession from the cycle highs of 2022. Fundamentals remain strong: firms have fortified balance sheets and locked in lower interest expenses since the pandemic, keeping defaults below historical averages and Wall Street expectations.
Meanwhile, attractive yields have stoked demand for higher potential returns and lower perceived risks. On the supply front, firms have focused more on reducing debt than on using it for growth or acquisitions. This favorable technical backdrop is helping support prices and keep spreads tight.
Debt reduction has lowered the average maturity of the Bloomberg US Corporate High Yield Index to a record low of under five years. So its average duration and spread duration—price sensitivity to spread changes—are also below average.
Tight Spreads Have Tended to Be “Sticky”
Based on our research, when spreads widen, it tends to happen quickly, and so do the recoveries. But judging from history, they could stay in their current tight range for quite a while. Since 1994, when spreads on the Bloomberg US Corporate High Yield Index fell below 400 basis points (bps), they’ve taken an average of 28 months to climb back to the long-term average.
That’s a considerable amount of time to forego attractive income and return potential. When spreads have ranged from 300 to 400 bps, ensuing one-year index returns have averaged about 6.6%. If the Fed avoids a recession, spreads might tighten further. Meanwhile, overall yields are at their highest in years. Yield, which is 7.3% today, has been a much better return predictor than spreads (Display).
Past performance and current analysis do not guarantee future results. An index cannot be invested into directly.
YTW: yield to worst; GFC: global financial crisis
As of August 31, 2024
Source: Bloomberg and AllianceBernstein (AB)
In High-Yield Bond Investing…Think Active
We believe that skilled active management may enable high-yield managers to outperform benchmarks and passive strategies. Winning by not losing—avoiding defaults and managing downside risk—matters more than finding top performers, in our view. Because passive funds are based on an index, they struggle to avoid these risks.
On the other hand, active managers have a broader toolkit that may help enhance returns—including risk management, sector rotation and security selection. And active managers’ selectivity may reduce transaction costs, whereas passive strategies often incur higher costs by trading indiscriminately.
Going Active to Tap High-Yield Potential? Consider the AB High Yield ETF
Investors seeking an active high-yield strategy should explore the AB High Yield ETF (NYSE: HYFI), which seeks high income through security selection, dynamic beta management and a disciplined investment process. HYFI’s performance has outpaced both its active and passive peer groups (Display).
The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent Standardized Performance and month-end performance at http://www.abfunds.com. The total expense ratio for HYFI is 0.40%.
As of August 31, 2024
Source: Morningstar and AB
For standardized performance, click here.
Need ETF trading guidance? AB’s ETF Capital Markets team offers complementary trade advisory services. Contact us at etf.capitalmarkets@alliancebernstein.com. Explore AB’s actively managed ETFs here.
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AllianceBernstein L.P. (AB) is the investment Advisor for the Fund.
Distributed by Foreside Fund Services, LLC. Foreside is not affiliated with AllianceBernstein.
Prior to close of business on 5/12/2023, the Fund operated as an open-end mutual fund. The Fund has an identical investment objective and substantially similar investment strategies and investment risk profiles as the predecessor mutual fund. The NAV returns include returns of the Advisor Share Class of the predecessor mutual fund prior to the Fund’s commencement of operations. Performance for the Fund’s shares has not been adjusted to reflect the Fund’s shares’ lower expenses than those of the predecessor mutual fund’s Advisor Share Class. Had the predecessor fund been structured as an exchange-traded fund, its performance may have differed. Please refer to the current prospectus for further information. Performance prior to 7/27/16 reflects AB High Yield Portfolio, a series of the AB Pooling Portfolios that was reorganized into the Fund and is the surviving entity in the reorganization. Performance for those periods would have been lower if such accounting survivor had operated at the Fund’s current expense levels. Prior to 4/30/21, the Fund was called AB FlexFee High Yield Portfolio. Data prior to 4/30/21 relates to AB FlexFee High Yield Portfolio.
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