A Corporate Bond ETF that pays 15% yields? (HYGW)
New ETF Sells calls against high yield bonds to generate income
Symbol: HYGW
Description: For the older investors, “high yield bonds” may call back to the junk bonds of the 1980s. Back then, these bonds would involve likely default companies that were grouped together to help move these bad individual investments. Now, corporate high yield bonds are much safer and involve much more reputable companies. The parent index (HYG) includes bonds for such companies as Ford (F), oil giant Occidental Petroleum (OXY) & health care staple Tenet Healthcare (THC). With a basket of over 1200 bonds, the diversification of HYG significantly cuts the small risk that exists with these bonds. The 15% yield is created from a 5-6% dividend yield from holding these bonds while also selling calls to generate another 9+% in pure income. The fund has only been active since Sept of 22, but the parent HYG has been around since 2007. It has survived both the 2008 and most recent 2023 banking crisis without too much damage. Overall, the income produced seems fairly stable even with a fairly flat share price.
Current Price: $35.76
Dividend Yield: 15%
Performance: Down 1.17% over the past month
- Down 2.5% over the past 3 months
- Down 3.89% over the past 6 months
- Down 1.46% YTD
Holdings: The main holdings are the parent fund HYG - an ETF comprised of high yield corporate bonds. Just because the bonds are mostly B-BBB rated doesn’t mean they are held by poor companies. Some companies included (in addition to the ones mentioned above) include Caesar’s Entertainment, Nissan motors, Sirius XM, Direct TV and others. The fund also sells calls against HYG - the current one is a June 23 out of the money call.
Opinion: HYGW is another creative way to generate a high monthly yield with lower risk. The upside is capped with the sold calls, but that also means the downside is also limited. It pays a variable monthly dividend between $0.40 and $0.70 most months. As with other covered call funds, you don’t need to pay additional taxes on these sold calls as they are provided to you as a distribution from the ETF. I don’t expect the fund to mature a great deal and probably bounce around $36 moving forward. It is essentially a savings account paying a 15% annual return (with some additional risk).
Personal investment: This is one of the 10% leaders in my portfolio. As with others, you can DCA into the position over time and feel good about the value here. It has dropped from $40 at inception (was overpriced to NAV) and has now settled between $35.5 and $37.5. The current price is a good spot to begin a position.
Summary: ETFs that pay a 15% dividend with downside protection are exactly the sort of investments we are looking for in this style of portfolio. Scaling into a position over time can even increase the annual yield. This isn’t as sexy as a growth stock, but it an attractive 10% position in a high yield portfolio!
Fund Link: iShares High Yield Corporate Bond BuyWrite ETF (HYGW)