2010-05-22

Vehicles for shorting the high-yield municipal and corporate bonds [update]

As I've been looking into shorting the municipal bond market and potentially the the corporate one as well, I've done some research that I would like to share with you.

Here's the short list of product that will fit the purpose:

High-Yield Municipal Index ETF (HYD)
Market Vectors High-Yield Municipal Index ETF (the Fund) seeks to replicate as closely as possible, the price and yield performance of the Barclays Capital Municipal Custom High Yield Composite Index (the Index). The Index is a market-size weighted index that is designed to track the high-yield segment of the municipal market with better liquidity. The index is made up of a 25% or 75% blend of investment-grade triple-B and non-investment grade munis, and draws 75% of its holdings from bonds issued as part of transaction sizes of $100 million or more.
The fund is very close to its all time high, which makes it a very good candidate for shorting.

Pros:
  • Exactly what we were looking for to short: the high yield muni market
Cons:
  • Very small fund, little volume: liquidity risk should not be ignored
  • High cost of carry: 7% yield currently
  • It might be difficult to find shares to borrow for shorting
  • Can't find options on this fund
Fund Page at Van Eck
Fact Sheet

Short Municipal Index ETF (SMB)
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Barclays Capital AMT-Free Short Continuous Municipal index. The fund normally invests at least 80% of total assets in fixed income securities that comprise the index. It has adopted a fundamental investment policy to invest at least 80% of assets in investments suggested by its name.
[Update 2010-07-10] Warning: This is not a short ETF. It's long the short term debt. Easy to get confused given the name and description!

Has been trading in a very narrow range since inception.

Pros:
  • Exposure to short term muni debt, which means we can short it.
Cons:
  • Very small fund in terms of assets
  • Very low volumes (might get hit by the spread and depth of the market)
  • Can't find options on this fund?
Fund Page at Van Eck
Fact Sheet

Direxion Dynamic HY Bond Bear Fund (PHBRX)
The investment seeks to profit from a decline in the value of lower-quality debt instruments. The fund invests at least 80% of net assets (plus any borrowing for investment purposes) in high yield debt instruments, commonly referred to as €œjunk bonds€ or derivatives of such instruments. Debt instruments include corporate debt securities, convertible securities, zero-coupon securities and restricted securities. It may invest up to 15% of assets in instruments generally rated below Caa by Moody's or CCC by S&P or derivatives of such instruments.
The fund is very close to its all time low, although being a dynamic fund, this is less meaningful than a passive index.

Pros:
  • Junk bonds short? It's all we're looking for.
Cons:
  • Inverse ETFs have normally a high expense cost and behave non-linearly compared to the real index
  • Very small fund in terms of assets
  • Very low volumes (might get hit by the spread and depth of the market)
  • Can't find options on this fund?
Fact Sheet
High Yield Funds Strategy Literature


So I've done a large bit of my homework, but I'm looking forward to have your opinions and comments!

2 comments:

Rena said...
This comment has been removed by a blog administrator.
pej said...

Sorry Rena - no ads please, and no scams neither