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The iShares Euro High Yield Corporate Bond ETF offers investors exposure to the EUR-denominated market of non-investment grade corporate debt. Gaining exposure to the high yield corporate bond market is often thought of as a way to generate higher returns relative to better credits, though investors in this particular asset class will have to accept the trade-off of much higher notional risk vs. investment grade corporate debt. This means that expectations for a steady stream of income will be lower while the risk profile (e.g. default is not a rare occurrence in high yield) will be higher.
In our view, the combination of a substantial yield pick-up and the notable risk profile means this ETF would be best deployed as a satellite component of a fixed income investment portfolio, and probably one with a relatively small weight. Meanwhile, investors with a high tolerance to risk are likely to feel comfortable overweighting positions in this ETF with the objective of boosting overall portfolio returns. In fact, for this type of investor, a high yield ETF may not actually be a tactical bet but rather the preferred vehicle to meet the strategic need for exposure to the corporate debt market. In this particular, but minority, case we could find this ETF playing a core role in investment portfolios.
Irrespective of risk tolerance, all investors need to take into consideration the effects of monetary policy decisions, in this case those by the European Central Bank, on the value of this fixed income investment. This ETF tracks an index with duration around the four year mark. Also, non-Eurozone investors will need to account for value effects arising from foreign exchange gyrations.
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