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DWS has launched a new US bond ETF offering dynamic risk-controlled exposure to the USD high yield corporate bond market.
the Xtrackers Risk Managed USD High Yield Strategy ETF (HYRM US) was listed on NYSE Arca.
The fund is linked to Adaptive Wealth Strategies Risk Managed High Yield Index which was developed by the indexing arm of the registered investment adviser NorthCrest Asset Management.
The index is calculated and maintained independently by a company based in Frankfurt Solactive.
The strategy uses a daily algorithm to dynamically adjust exposure between US dollar-denominated high yield corporate bonds (provided by investing in DWS’ extended market high yield corporate bond ETFs) and in cash equivalents (represented by the Solactive Fed Funds Effect Rate Total Return Index).
It is designed to fully track the high yield corporate bond market under normal market conditions while shifting entirely to the US dollar cash position when two quantitative risk signals both indicate adverse market conditions.
The end goal of the strategy is to remain invested in high yield bonds as much as possible, achieve low tracking error relative to the broader market, and provide meaningful downside protection if needed.
The two quantitative risk signals are the CBOE Volatility Index (VIX) z-score, a measure of the expected future volatility of large-cap US stocks, and the Moving Average Convergence Divergence (MACD) z-score, a short – Futures momentum indicator designed to quickly identify changing trends in the high yield bond market.
When the VIX rises two standard deviations above its mean and the MACD falls more than one standard deviation below its mean, the strategy will exit high yield exposure. NorthCrest notes that equities tend to sell first (higher VIX) before bonds are impacted as the latter are higher in the capital structure. The firm therefore believes that the combination of MACD on high yield and volatility on equities acts as a perfect marriage to detect risky or risky environments.
Once a signal is given, it remains in place for a minimum of ten days to avoid the circular saw effect of trend changes and the high costs associated with frequent trading.
The ETF comes with an expense ratio of 0.30% which includes the cost of investing in DWS’ broad market high yield corporate bond ETFs.
Michael Curtis, Head of US Passive Products at DWS, commented: “HYRM can be an attractive way for investors to gain exposure to the USD high yield bond market with an integrated risk management process. Downside, or downside, risks are a key factor when allocating to high yield bonds, which HYRM’s underlying index allocation mechanism seeks to address effectively.
Patrick Bobbins, Vice President of NorthCrest Asset Management, added: “We are delighted to see the continued development of the Adaptive Wealth Strategies indices in the fixed income markets. We appreciate the opportunity to partner with DWS Xtrackers on this risk managed high yield strategy and bring our third index to market.