This piece was originally posted on Manulife Investments / John Hancock’s website
Investing in a passive ETF is often seen as a way for investors to receive cheap and liquid exposure to a certain asset class, with these funds closely tracking a broad-based benchmark. However, investors in passive high-yield ETFs may run the risk of missing out on a substantial portion of the potential returns offered by high-yield investments.
The limitations of passive high-yield ETFs are evidenced by persistent and consistent underperformance compared against a broad market index. One reason for this shortfall is that some of the largest passive high-yield ETFs attempt to track a narrower benchmark comprising the largest and most liquid high-yield bonds. This approach reduces the value that can be provided by using a broader, more diversified approach to smaller or less-familiar issuers and has the effect of limiting long-term return potential while being exposed to similar market beta.
The views presented here or those of the author(s).
Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if a creditor, grantor, or counterparty is unable or unwilling to make principal, interest, or settlement payments. An issuer of securities held by the fund may default, have its credit rating downgraded, or otherwise perform poorly, which may affect fund performance. Investments in higher-yielding, lower-rated securities are subject to a higher risk of default.
Read the post in its entirety
Visit Manulife Investments / John Hancock’s Sponsor Page
