The vast majority of exchange-traded funds track an index and charge rock-bottom fees. Advisor Shares Peritus High Yield is one of a rare breed of ETFs that does neither—without any harm, so far, to its shareholders. Over the past year, Peritus outpaced the average junk-bond ETF by 3.8 percentage points.
In the relatively small junk-bond market, active management works better than indexing, says Peritus co-manager Timothy Gramatovich. For example, SPDR Barclays High Yield Bond, one of the biggest junk ETFs, tracks an index that owns bond issues with outstanding values of at least $500 million. Gramatovich and co-manager Ron Heller can—and do—invest in smaller, potentially more rewarding issues.
Their fund currently occupies the lower rungs of the junk-bond credit spectrum, which explains its lofty 7.9% yield. It has 69% of its assets in bonds with single-B ratings (compared with 39% for the category average), says Morningstar, and nearly 30% in unrated bonds and those rated below B. But Gramatovich argues that rating agencies have a size bias, and as a result the bonds Peritus holds receive lower ratings than they deserve.
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As with any actively managed fund, you’ll have to trust the managers, Gramatovich and Heller, to get their research right. That’s especially so in light of the fund’s 1.25% annual fee, which is more than twice the average for junk-bond ETFs.
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