As an investor that weathered the recent financial crises and the tech bust back in 2000, there's something extraordinarily reassuring about dividend focused strategies. Having cash hit your brokerage account every month just feels good. Luckily, it turns out it's made for good investing too.
The Leveraged HYG Strategy - has the risk been worth it?
Our previous two posts discussed how to create a portfolio with a dividend yield of 17% by establishing a leveraged position in HYG – a high yield corporate bond ETF. We used risk analytics to show that the leveraged HYG portfolio comes with about twice the overall risk as an S&P 500 portfolio (i.e. SPY) – not bad considering the dividend yield, though certainly not great either.
Figure 1 below shows the performance of the 3-to-1 leveraged HYG portfolio over the past two years (assuming dividends are reinvested). The total return on the portfolio is 51%, representing an average return of 1.68% per month.
Clearly, the returns of HYG have been quite attractive. Both the return from dividends, as well as the returns from capital appreciation have made this portfolio a big winner during the past two years. Undoubtedly, this is a result of the excellent performance of corporate bonds: contracting credit spreads coupled with low default rates. It's been a great time to be a corporate bond investor indeed.
Figure 1 below shows the performance of the 3-to-1 leveraged HYG portfolio over the past two years (assuming dividends are reinvested). The total return on the portfolio is 51%, representing an average return of 1.68% per month.
Clearly, the returns of HYG have been quite attractive. Both the return from dividends, as well as the returns from capital appreciation have made this portfolio a big winner during the past two years. Undoubtedly, this is a result of the excellent performance of corporate bonds: contracting credit spreads coupled with low default rates. It's been a great time to be a corporate bond investor indeed.
Figure 1. HYG from Oct 27, 2010 to Oct 26, 2012
| Figure 2 shows a number of performance statistics at the daily, weekly and monthly levels. The most notable stat (other than the return) is the Minimum Return experienced in a given month at -17%. Obviously, a large negative return like this is something most investors want to avoid. Some would say it's is an inherent danger of leveraged portfolios. Or is it? Thus we arrive at the crux of the matter: is there a way to reduce the risk of this portfolio without watering down the returns significantly? The answer of course is "Yes". We'll explore this question in more detail in the next post. |  Figure 2. HYG performance stats from Oct 27, 2010 to Oct 26, 2012. |
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