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

In the realm of income-focused investing, fixed income securities occupy a pivotal role. Among the numerous options available, the First Trust Tactical High Yield ETF, commonly referred to as HYLS, provides a compelling opportunity for those seeking high-yield income. Let’s take a deeper dive into what HYLS is and explore its pros, cons, and potential investment strategies.

What is HYLS?

HYLS, or First Trust Tactical High Yield ETF, is an exchange-traded fund that aims to provide investors with high income through exposure to a diversified portfolio of high-yield or "junk" bonds. Unlike traditional fixed income investments, junk bonds offer higher yields but come with increased risk.

Key Features of HYLS

• Active Management: HYLS is actively managed, offering flexibility in adjusting the bond portfolio to market conditions rather than strictly following an index.
• High Yield: Focuses on bonds that offer higher yields compared to investment-grade bonds.
• Tactical Allocation: The fund managers can adjust the composition based on market conditions, seeking opportunities for higher returns while managing risks.

The core of HYLS's strategy lies in its active management, allowing it to shift investments based on prevailing credit and interest rate environments.

HYLS Composition

HYLS primarily invests in U.S. high-yield bonds but may also incorporate international bonds to diversify risk and maximal return potential. The fund consists of a mix of corporate bonds issued by different sectors, such as energy, healthcare, and industrials, which offer high yields.

Pros of HYLS

Higher Income Potential

HYLS stands out because it provides a higher income potential compared to traditional fixed-income instruments. This makes HYLS particularly attractive to income-focused investors looking to enhance their yield.

High-yield bonds offer elevated returns because they carry more credit risk, which is the risk of the bond issuer defaulting on its payment obligations.

Active Management Benefits

The active management characteristic of HYLS allows for responsive adjustments to market dynamics. The fund managers can tactically reallocate the portfolio to capture opportunities and mitigate risks, potentially enhancing returns and managing volatility effectively.

Diversification

HYLS offers a diversified portfolio of high-yield bonds across various sectors and issuers. This diversification can help mitigate risks associated with individual issuers, offering more stable income under varying market conditions.

A well-diversified portfolio reduces the impact of any one bond's poor performance on the overall fund.

Cons of HYLS

Higher Risk

The primary downside of investing in HYLS is the higher risk associated with high-yield bonds. These bonds are issued by companies with lower credit ratings, making them more susceptible to defaults, especially during economic downturns.

Higher Expense Ratio

Compared to passively managed high-yield bond ETFs, HYLS typically has a higher expense ratio due to its active management style. This can eat into your net returns over time.

Interest Rate Sensitivity

Like other fixed-income securities, HYLS is sensitive to interest rate changes. Rising interest rates can cause the value of existing bonds to decline, which can negatively affect the ETF's performance.

HYLS Investment Strategies

HYLS can be a valuable addition to a diversified portfolio if used with the right strategy. Given its unique characteristics, here are some investment strategies that investors might consider.

Income Generation Strategy

Investors seeking regular income can benefit significantly from HYLS. By incorporating this ETF into their portfolios, they can take advantage of its higher yield to augment their income streams. This strategy is particularly beneficial for retirees or those nearing retirement in need of a steady cash flow.

Regularly reviewing the fund’s performance and understanding the credit environment can help ensure it continues to meet income goals.

Diversification Strategy

Incorporating HYLS as a part of a broader diversified investment strategy can help balance income generation with risk management. By pairing HYLS with other conservative investments, such as investment-grade bonds or dividend-paying equities, investors can stabilize their portfolio’s overall performance.

Active Management Leverage

Investors who believe in the power of active management to navigate credit and interest rate risks can leverage HYLS’s tactical approach. Trusting the fund’s managers to make wise adjustments based on market insights can potentially improve risk-adjusted returns.

It’s crucial to stay informed about the fund’s managerial decisions and market outlook to ensure the investment aligns with your risk tolerance and financial goals.

Conclusion

HYLS presents an intriguing option for investors looking to capture higher yields through a diversified, actively managed portfolio of high-yield bonds. While its higher return potential and active management are significant advantages, investors must weigh these benefits against the associated risks and costs. Incorporating HYLS into a well-rounded investment strategy can offer substantial income benefits while managing risk through diversification and active oversight.