This article series aims at evaluating ETFs (exchange-traded funds) regarding past performance and portfolio metrics. Reviews with updated data are posted when necessary.

HYGV strategy

FlexShares® High Yield Value-Scored Bond Index Fund ETF (NYSEARCA:HYGV) is an ETF investing in high-yield corporate bonds (referred to as "junk bonds"). It has 1,048 holdings, a distribution rate of 8.49%, a 30-day SEC yield of 7.44%, a net expense ratio of 0.37% and pays monthly distributions. It was launched on 07/17/2018 and tracks the Northern Trust High Yield Value-Scored US Corporate Bond Index.

As described in the prospectus by FlexShares, the underlying index implements a rules-based methodology to select and weight U.S.-listed, US-dollar denominated bonds below investment grade (but not in default). For this purpose, it uses a value score, credit score, and liquidity score, mostly based on quantitative rankings of characteristics obtained from company filings. Additionally, "the optimization process also includes issuer level, sector, effective duration, low credit and liquidity score, duration band, and turnover constraints to seek to manage systematic risk." The portfolio turnover rate is high: 167% in the most recent fiscal year.

Portfolio

About 84% of asset value is invested in the debt of U.S. companies. Canada weighs 4.9%, while Australia, Luxembourg and the U.K. are in a 2% to 3% range. Other countries are below 1%. Regarding sectors, the fund is overweight in industrials (36.7% of assets).

Almost half of asset value is in securities with a BB rating, the highest for junk bonds (BBB is investment grade).

About 62% of assets have maturity below five years.

The top 10 holdings, listed below, represent 7.1% of the portfolio.

Performance

Since its inception in 2018, HYGV has outperformed a junk bond benchmark, represented by iShares iBoxx $ High Yield Corporate Bond ETF (HYG). However, the gap in total return is only about 4% over six years.

Excluding distributions, HYGV has lost about 18% in value since its inception. HYG was a bit better at protecting capital, although a 7.6% loss isn't pretty either. Making the price decay worse for both funds, the cumulative inflation was about 25% in this time frame, based on CPI.

The annual sum of distributions has hardly increased between 2019 and 2023, from $3.44 to $3.58 per share. This 4% dividend growth was more than offset by the cumulative inflation (about 19%). Moreover, distribution history doesn't show a steady trend:

HYGV vs. Competitors

The next table compares the characteristics of HYGV and five high-yield corporate bond ETFs implementing rules-based strategies:

• iShares 0-5 Year High Yield Corporate Bond ETF (SHYG).
• VanEck Fallen Angel High Yield Bond ETF (ANGL).
• iShares Fallen Angels USD Bond ETF (FALN).
• First Trust Tactical High Yield ETF (HYLS).
• Invesco Fundamental High Yield Corporate Bond ETF (PHB).

HYGV has the highest four-year average yield. The next chart plots total returns since its inception. HYGV is in the middle of the pack, significantly lagging the two "fallen angels" funds, which invest in the debt of companies having lost their investment grade rating.

Takeaway

FlexShares High Yield Value-Scored Bond Index Fund (HYGV) is a junk bond ETF focused on fundamentals and risk management. It's overweight in debt of U.S. industrial companies. Since its inception, HYGV has outperformed a junk bond benchmark and several competitors. On the downside:

• It has lagged "fallen angels" bond ETFs.
• It has suffered a significant decay in value.
• Despite an increase in 2023, its distribution history lags inflation.

For these reasons, I don't see HYGV as an attractive long-term investment and I give it a "Sell" rating. However, like many ETFs, it may be profitable for seasoned investors as a swing trading instrument.