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Corporate - High Yield ETFs
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About Corporate - High Yield ETFs |
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Corporate High Yield ETFs Overview and forecast
The word corporate says a lot about these ETFs. They focus on returns from corporate debt, transactions, yields, and other instruments and methods of return. They deal in advanced financial products, and they can get quite technical, in terms of analysis.
During the crash, the corporate sector was definitely not everybody's idea of a great place to be, and negative sentiment floored most ETF prices. The Corporate High Yield ETFs took hits up to nearly 60% during the 12 month period. They've generally managed to stage a reasonably convincing recovery as a sector, however, in the first half of 2009, if basically returning to price levels, rather than making ground.
It's pretty obvious that a lot of repositioning has taken place since the meltdown, and that the stigma of the big but necessary writedowns has largely worn off. The corporate sector remains an unfashionable, risk- associated part of the industry in the media, so the logical base for the apparent rebound has to be a general improvement in outlook for these products.
The Corporate High Yield ETFs, however, apparently have a dichotomy in their bags. There's a big contrast between the new approach to income and the old. A case in point: ETFs tend to have a lower profile as investment news, so the fact that one of the Corporate High Yield ETFs, Van Kampen High Income Trust II (VLT) has gone into a vertical climb in the mid second quarter of 2009 is worthy of note. One of the owners of VLT is none other than the much bruised and battered Merrill Lynch. It's also part of the big Van Kampen stable of investment funds. VLT is very actively managed, and this ETF has recently announced it will invest in floating loans, and has done a reverse share split ( a consolidation, the opposite of a normal share split), which generates higher unit prices.
This level of management agility has produced a figure of a 734.56% over the six month period to late May 2009. It says a lot about the state of the market for this class of ETF, because this level of return has happened in the face of a decidedly bearish market, and trade is at roughly normal levels, despite the fact that the consolidation has pushed prices up from a fairly mediocre $2 or so to over $10. This is a good example of what restructuring and less comatose management can do for ETFs, and VLT in its former incarnation was very much in need of ideas and a credible makeover.
Short term (6 months)
A makeover is pretty much what the Corporate High Yield ETFs need. They trade generally at rather pedestrian levels. Their short term margins are just barely within trader tolerance levels. VLT seems to have defined the problems with the sector quite well. The rebound in the first half of 2009 is off very low bases. As traders, some of the Corporate High Yield ETFs are positively dull. Investor interest seems to be based on the longer term, and volumes and margins are generally low and thin.
Any short term assessment of the Corporate High Yield ETFs can only work on the basis of a thoroughly unimpressive set of past and current performances. Some of these ETFs are much older than most ETFs. Their structures come from the 1990s, and so does their performance. It's hard to enthuse, unless one considers a longer term upside.
Medium term (2 years)
It's quite possible that the medium term will produce the effect of a rising tide, as increased liquidity enters these markets. Whatever happens to be floating around will rise higher. That's not a recommendation so much as proof Archimedes would have done well as a market economist. The charts for the Corporate High Yield ETFs look like one of those random jagged lines drawn by a child, and as investment fodder, they're unacceptable in the modern market.
Restructuring, and focusing on something other than more of the same, would help persuade the market that these funds are capable of real world results. The old style funds are well and truly out of the loop. In the old days, dividends and simple payments rolled around, and everyone slept soundly. That's no longer the case. This is one case where the short term perspective outweighs the longer term. In this area of investment, something which does very little in the short term is likely to do very poorly in the longer term. Sadly for the Corporate High Yield ETFs, these chickens are now coming back to lay more bad eggs in the medium term unless the funds start growing up.
Long term (5 years)
Most people are cynical about even the idea of Market Forces. The whole concept has largely been and gone, but it still exists in the sense that the market can force changes on those trying to sell anything to it. The Corporate High Yield ETFs are about to find that out. VLT has now laid down a new approach, and left the other ETFs to compete with returns which are solidly in the three digit zone. Nobody's expecting VLT to continue to achieve these returns, but the comparison between the Ferrari and the horse and cart couldn't be more obvious. The lesson for the Corporate High Yield ETFs is Compete or Die. A remodeling worked where a decade of doing nothing failed dismally.
Unlike other classes of ETFs, the Corporate High Yield ETFs are performing badly even with high capitalization, so their methods can now be considered expired. Any long term view of the Corporate High Yield ETFs must be based on management performance and proven results from that performance. There's no reason for the market to tolerate any further renditions of Investment according to Ma and Pa Kettle. Long term, this should be a buyers' market, until modernization.
Qualifiers to projections
One of the major long term historical problems for the income based sector has been holdover strategies from the 1980s, when the cash market was relatively new, and whole ranges of derivatives and other forms of income generation were barely starting to move, and many of them didn't yet exist. The stunningly drab performance of the Corporate High Yield ETFs reflects a culture that doesn't work, not a dysfunctional market. This sector's problems precede the crash by many years. The only really surprising thing about them is that their operators apparently haven't noticed the sort of returns other investments have been achieving over the last 10 years or so.
These ETFs have to compete with other forms of investment to be worth investor's time, and that fact has evidently only recently come to the attention of their managers. You can almost hear the ghosts of investors who bought in at inception prices, crying out for revenge. It is suggested that if investors want to invest in history, they can donate to the Smithsonian, the Guggenheim, and other worthy institutions. The aesthetics are likely to be more rewarding.
Investors can also vote with their feet. Study VLT, and see what's been done, then compare that with the management of other funds. Market forces will beat market farces, any day.
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Last Updated on: 2010-01-14 02:03:40 |
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