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Wednesday, September 30, 2015

A Note on HYLD

HYLD, the advisorshares short term high yield ETF has taken a sharp price decline over the last few days. The ETF went ex dividend on September 24  with a $.32 dividend. Morningstar's analysis puts the 30 day SEC yield at 10.92%.

Since the duration is 2.8 years  the ETF should be less exposed to changes in the overall level of interest rates than longer duration bonds  such as  those in the high yield bond index ETF JNK which has a 4.2 year duration, And its yield is  close to 4% higher than the JNK

Last year HYLD eliminated stocks from its portfolio and significantly reduced its exposure to the energy sector. Its assets under management have declined sharply and are now under $300 million.      This means the instrument can be extremely volatile and thus are definitely not for short term investors/traders. And poor execution in trades in HYLD can be particularly costly.

As yields have moved up/prices declined funds have flowed out of high yield ETFs. JNK  the largest high yield ETF lost just under $600 million in assets in the week from September 22 -28 second only to XLV the healthcare SPDR ETF (more performance chasing). But because the fund is liquid the price of the ETF has remained close to intrinsic value, In fact according to Morningstar it traded at a slight premium on September 29.This is despite the fact that the trading volume was 11.8 million shares vs an average of 8 million

HYLD however suffered from a lack of liquidity. When there is a spike in volume it can move to a large discount to intrinsic value as traders react to price regardless of value. Therefore as of market close on September 29 it is trading at a discount of 3.26% to intrinsic value. This is compared to an average discount of .21%. In other words $1 worth of the bonds in HYLD was selling at $.9674 

While there is no guarantee the discount will close in the near term long term investors would certainly be advised not to sell with the ETF trading at such a large discount. It is not surprising that the large price decline occurred on a day of high volume on September 28 . On that day HYLD fell from 37.05 to 35.90  a decline of  2,8% pushing it to a large  discount vs intrinsic value You can see below the volume compared to previous days. listed are high, low close and volume.

Sep 29, 201535.6236.6335.6235.8852,60035.88
Sep 28, 201537.0537.0535.8035.90170,60035.90
Sep 25, 201536.9237.2436.8837.1021,40037.10
Sep 24, 201537.1737.4936.9236.9447,30036.94
Sep 24, 20150.322 Dividend
Sep 23, 201537.6937.7537.5037.5177,10037.19
Sep 22, 201537.7237.8037.5237.6151,60037.29
Sep 21, 201537.8238.0437.7237.9545,10037.62
Sep 18, 201537.9638.0537.7837.9070,60037.57
Sep 17, 201537.8038.1937.7838.0874,30037.75
Sep 16, 201538.0838.1837.5237.8872,70037.55
Sep 15, 201538.3238.3237.9237.9382,30037.60
Sep 14, 201538.3338.3338.2338.249,10037.91

What could have happened to cause this move ? it seems the best explanation is poor execution by a seller/sellers of HYLD. I have written before about the importance of trade execution. In this case it seems pretty clear that whoever was selling HYLD on September 28 wasn't practicing good trade execution,. HYLD fell 2.4% in the first two hours of trading with a large spike in volume during that period. On this 2 day chart below you can see the price decline on the spike in volume (bottom scale). It is also clear something very strange went on during the open on Tuesday the 29th..another example of the rule of avoiding trading during the opening hour of trading.

What conclusions can be drawn from this:

  • HYLD is definitely not a short term trading instrument, in order to benefit from its high yield it needs to be held longer term to capture the dividend flow and not to be overly concerned with short term movements such as those that push the ETF to large discounts vs intrinsic value. In order to benefit from the high yield one must have the fortitude to hold through the price fluctuations
  • Trade execution is crucial particularly in relatively low liquidity instruments like HYLD,
  • Sales at the current discount of 3% are certainly does not look to be a good point to sell, those looking for an entry point might find the price reflecting the heavy discount an attractive one,

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