FDHY: Not The Time For Credit Risk

seekingalpha06-18

FG Trade Allow me to start off by saying I am bearish on credit risk. I think junk debt is grossly mispriced relative to high-quality bonds, and that it's only a matter of time until default risk gets...

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I think junk debt is grossly mispriced relative to high-quality bonds, and that it's only a matter of time until default risk gets...</p>\n\n<a href=\"https://seekingalpha.com/article/4699683-fdhy-not-the-time-for-credit-risk\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>FDHY: Not The Time For Credit Risk</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFDHY: Not The Time For Credit Risk\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-06-18 03:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4699683-fdhy-not-the-time-for-credit-risk><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>FG Trade Allow me to start off by saying I am bearish on credit risk. I think junk debt is grossly mispriced relative to high-quality bonds, and that it's only a matter of time until default risk gets...</p>\n\n<a href=\"https://seekingalpha.com/article/4699683-fdhy-not-the-time-for-credit-risk\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"FDN","symbol_name":"First Trust Dow Jones Internet I","start_time":0,"source_url":"https://seekingalpha.com/article/4699683-fdhy-not-the-time-for-credit-risk","article_id":"2444111934","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1313467326/image_1313467326.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2444111934","pubTimestamp":1718652180,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"For the past three years, they've performed roughly the same in a tight range. No real edge, apparently from the way the bonds are selected in FDHY. Also, not a surprise, as it's generally difficult to outperform a passive approach in a sustained way. StockCharts.com Pros and Cons On the plus side, investing in FDHY gets you some nice high yield. It's got strong diversification, weeds out the very risky high-yield junk bonds, and generally has performed well in this cycle . None of this is enough for me generally though when it comes to this part of the bond market. High-yield/junk bonds are issued by companies with poor credit ratings. Because they carry more risk of default, they","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"FDN":"First Trust Dow Jones Internet I","JNK":"债券指数ETF-SPDR Barclays高收益债","BK4588":"碎股","BK4585":"ETF&股票定投概念","BK4550":"红杉资本持仓","FDHY":"Fidelity High Yield Factor ETF"},"translate_title":"FDHY：现在不是信用风险的时候","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"FDHY":1,"JNK":1,"US10Y.BOND":0.9,"US12M.BOND":0.9,"US2Y.BOND":0.9,"US30Y.BOND":0.9,"US3Y.BOND":0.9,"US5Y.BOND":0.9,"US6M.BOND":0.9,"US7Y.BOND":0.9,"FDN":0.82,"US912797HE00.BOND":0.6,"US912797GW17.BOND":0.6,"US912797GL51.BOND":0.6,"US912797GK78.BOND":0.6,"US912797GB79.BOND":0.6,"US912797FS14.BOND":0.6},"content_text":"FG Trade Allow me to start off by saying I am bearish on credit risk. I think junk debt is grossly mispriced relative to high-quality bonds, and that it's only a matter of time until default risk gets reflected in junk bonds. Having said all that, I've also been bearish on credit since October of last year, and credit spreads have only continued to narrow. So if there's more juice in junk debt, and you want to squeeze as much as possible out of this part of the bond market, then you may want to consider the Fidelity High Yield Factor ETF (NYSEARCA:FDHY). This actively managed exchange-traded fund, or ETF, gives investors exposure to a range of high-yield corporate bonds selected by a team of experts at Fidelity Investments using a proprietary multifactor quant model which looks at bonds with the highest likelihood of outperforming without a high potential risk of default. This, of course, means that we won't know if the methodology is strong until there is a real strain on corporate credit (which there hasn't been for some time). A Look At The Holdings FDHY has more than 350 bonds in its portfolio. The top 10 positions account for 13.32% of the portfolio, and the portfolio includes bonds from nearly 300 different issuers. fidelity.com These holdings have a maturity on average that's less than 5 years. This is important as it suggests movement will be more tied to credit risk in the near term than duration risk in the long term. fidelity.com Credit Quality FDHY is broadly diversified - as one would expect from a fund that tracks the broad spectrum of high-yield corporate bonds. The key thing here is the credit quality. ycharts.com Nearly all the bond issues in the fund are rated BB or B. This gives me a bit of comfort as it avoids CCC or below-rated, which is where real credit risk could come out of nowhere and meaningfully damage the fund's performance profile. This also explains the relatively high yield, which currently stands at around 6.56%. Peer Comparison: FDHY vs. JNK The main fund to compare this to is the SPDR® Bloomberg High Yield Bond ETF (JNK). Since FDHY is using a proprietary approach to screen the bonds it positions in, the question is: How has that performed versus the more passive JNK fund? For the past three years, they've performed roughly the same in a tight range. No real edge, apparently from the way the bonds are selected in FDHY. Also, not a surprise, as it's generally difficult to outperform a passive approach in a sustained way. StockCharts.com Pros and Cons On the plus side, investing in FDHY gets you some nice high yield. It's got strong diversification, weeds out the very risky high-yield junk bonds, and generally has performed well in this cycle (a surprise given how aggressively rates have risen since 2020). None of this is enough for me generally though when it comes to this part of the bond market. High-yield/junk bonds are issued by companies with poor credit ratings. Because they carry more risk of default, they pay a premium, hence the term junk. The market broadly has not priced in default risk in any meaningful way, but I suspect it still soon can, given the underlying weakness in many small companies that have to roll over and refinance debt into higher rates. Furthermore, FDHY's actively managed structure and quantitative model are no guarantee of outperformance relative to its benchmark or peers. The fund's high-yield bond approach is trying to exploit inefficiencies in the market, but there's no guarantee it will generate alpha or outperform passive alternatives, as we saw relative to JNK earlier. Lastly, the fund does have some interest rate risk. As interest rates rise, the values of existing bonds will generally fall, and that could affect the fund's performance. Conclusion  There's nothing wrong with the Fidelity High Yield Factor ETF. I don't see anything that particularly stands out, so to me, this is more of an asset class call. If you think default risk won't rise, then go right ahead and allocate to junk debt bond funds like this. If you are nervous and think risk is mispriced, this is one to avoid. I fall in the latter camp for now.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.1","shortVersion":"4.28.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2444111934"}