Investors monitoring credit markets this year have likely heard plenty about private credit funds halting redemptions. Fears that those funds’ investment in select software companies are worth significantly less due to AI disruption was a large cause of this calamity.
There’s no denying that more capital, including plenty from retail investors, has flowed into less liquid private credit structures. Likewise, there’s no arguing that markets are assigning some vulnerability to software equities. That doesn’t mean income investors should abandon the high-yield segment. Opportunity remains and it can be accessed via more liquid avenues, including the WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD).
HYZD, which tracks the WisdomTree U.S. High Yield Corporate Bond, Zero Duration Index, offers advisors and some advantages. For starters, the ETF focuses on traditional high-yield corporate bonds – a highly liquid segment of the fixed income market. Second, the ETF has a mere 2% weight to bonds issued by software companies.
Inside HYZD Perks
The AI disruption trade may have unjustly punished some software companies. Some of those stocks may be screaming buys at current levels. Time will tell. As the situation relates to HYZD’s advantages in the current environment, it’s not just about an issuer’s industry, it’s also about borrower profile.
“Software companies financed in private credit tend to be smaller, more leveraged, and more dependent on growth assumptions,” notes WisdomTree. “Loan issuers are generally larger but still below high yield in diversification and resilience. High yield issuers, on average, are the largest and most diversified.”
Regarding liquidity, some corners of the high-yield are known for being less liquid than traditional junk-rated bonds. In sanguine environments, that’s not a cause for alarm, but as recent goings on confirm, liquidity challenges can arise without warning. With HYZD, investors get protection against those challenges.
“High yield offers liquidity, transparency, and generally higher-quality exposure,” added WisdomTree. “Leveraged loans provide floating-rate income with strong technical support, sitting higher in the capital structure but with more exposure to fundamental credit risk. Private credit extends that same lending into less liquid structures, with more concentrated exposures and a different timing of return realization.”
Bottom line: HYZD is a high-yield bond ETF right for these times and beyond.
Disclosures
This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
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