What is FLHY? (Pros, Cons, and Strategies)

Navigating the landscape of high-yield corporate bonds can be overwhelming, but the Franklin High Yield Corporate ETF (FLHY) offers an avenue for investors to gain exposure to this segment. Designed for those who aim to earn attractive yields, FLHY is a compelling investment vehicle deserving closer examination. In this blog post, we'll explore what FLHY is, including its pros, cons, and various investment strategies.

What is FLHY?

FLHY stands for Franklin Liberty High Yield Corporate ETF. It is a high-yield corporate bond ETF managed by Franklin Templeton Investments, aiming to provide high levels of income to its investors.

FLHY primarily invests in high-yield corporate bonds issued by companies that may have lower credit ratings but offer higher yields. The focus here is on income generation rather than capital appreciation.

Key Features of FLHY

• Focuses on high-yield corporate bonds
• Exposure to U.S. and non-U.S. issuers
• Managed by Franklin Templeton, a reputable asset management firm
• Diversified across multiple sectors

FLHY aims to provide higher yields compared to investment-grade corporate bonds by investing in bonds with lower credit ratings but higher yields.

FLHY Composition

FLHY's portfolio comprises a diversified array of high-yield corporate bonds across different sectors, including telecommunications, energy, healthcare, and financial services. While the credit ratings of these bonds are generally lower (BB or lower), the sectors are rigorously selected to provide investors with a diversified risk profile.

Pros of FLHY

High Yield

A primary advantage of FLHY is its high yield compared to investment-grade corporate bonds or government bonds. This makes it an attractive option for those looking to boost their income from fixed-income securities.

By investing in bonds issued by companies with lower credit ratings, FLHY offers a significantly higher dividend yield, often surpassing the 5-7% range. This makes it a viable option for income-focused investors.

Diversification

FLHY offers diversification by investing in various sectors and issuers. This helps in spreading risk, as a downturn in one particular industry is less likely to have a catastrophic impact on the overall portfolio.

Professional Management

FLHY is managed by Franklin Templeton, a well-known investment firm with extensive experience in the bond market. The professional management team looks to optimize the ETF’s holdings by actively managing risk and return.

Cons of FLHY

Credit Risk

One of the drawbacks of investing in high-yield bonds is the higher credit risk. Companies issuing these bonds are often rated below investment grade and have a greater chance of default. This risk can result in significant price volatility and potential loss of capital.

Interest Rate Sensitivity

FLHY is also sensitive to changes in interest rates. Rising interest rates can lead to a decline in bond prices, affecting the ETF’s value negatively. Investors should consider their outlook on interest rates when investing in high-yield bonds.

Lower Liquidity

High-yield corporate bonds can sometimes be less liquid than investment-grade bonds, which may result in wider bid-ask spreads. This could potentially impact the ease of trading and the transaction costs associated with buying or selling the ETF.

FLHY Investment Strategies

Given the characteristics of FLHY, it is crucial to adopt a well-thought-out investment strategy tailored to your financial goals and risk tolerance.

Income-Focused Investment Strategy

For those seeking regular income, FLHY can serve as a cornerstone of a diversified income portfolio. Given its high yield, it can supplement income from other sources such as dividends from stocks, fixed deposits, or rental income.

Tactical Allocation Strategy

FLHY is also suitable for a tactical allocation strategy, where investors periodically adjust their portfolio allocation to take advantage of market opportunities. For instance, during periods of declining interest rates, high-yield bonds tend to perform well, making FLHY an attractive option for short to medium-term investments.

Diversification Strategy

Another approach is to use FLHY as a component of a diversified bond portfolio. By combining FLHY with investment-grade corporate bonds, government bonds, and other fixed-income securities, investors can create a balanced portfolio with varying levels of risk and return.

Long-term Investment Strategy

Investors with a higher risk tolerance and a long-term investment horizon might benefit from holding FLHY. Despite the higher risk, the compounded interest from its high yields can significantly boost returns over the long run. This strategy involves periodic investing and reinvesting the dividends to leverage the power of compounding.

Conclusion

FLHY offers an appealing option for investors looking to increase their income through high-yield corporate bonds. With its high yield, diversification, and professional management, FLHY can be a valuable addition to a well-rounded investment portfolio. However, investors must consider the associated risks, including credit risk and interest rate sensitivity.

Carefully assessing your financial goals and risk tolerance is crucial when incorporating FLHY into your investment strategy. Whether you adopt an income-focused approach, tactical allocation, diversification, or long-term investment strategy, FLHY has the potential to meet diverse investment needs.