Back at the tail end of 2022, I was looking for an investment instrument suitable for investors with a short-term time horizon.

You will need the instrument to break even within your short timeframe at the very least because… you need the money by then!

There is not a lot out there except for bond ETFs with short tenors or, on average, short tenors.

The iShares $ Short Duration High Yield Corp Bond UCITS ETF, or SDHA for short, is one ETF that I considered but ultimately deemed as too high risk.

I did invest $2400 of my personal money just to see how it works so I am reporting back.

What Does the iShares $ Short Duration High Yield Corp Bond UCITS ETF Invest in?

The ETF tracks the Markit iBoxx USD Liquid High Yield 0-5 Capped Index.

Thus, the ETF invests in a portfolio of high-yield fixed-income debt, and its portfolio performance is similar to that of the index.

To be included in the iBoxx index, the fixed income need to:

1. Rated BB+ or lower from Fitch or S&P Global, Ba1 or lower from Moody.
2. Not default.
3. At least 6 months of expected remaining life for new insertions, zero for existing holdings.
4. US Dollars.
5. Mature between 0 to 5 years.
6. The index is market-cap weighted but each issuer is capped at 3%.

The ETF currently holds 1055 fixed-income issues.

Here is the portfolio broken down into its credit profile:

Even within fixed income with poorer credit ratings, there are grades to them.

So how different are the different grade of bonds?

I used to have this table lying around to give us a sensing how likely are the bonds likely to default based on a short history:

When shit hits the fan, don’t be surprise that the default rate of CCC to be 40%. So that 6.47% allocation to CCC most likely becomes 3.5% which means that there will be some losses due to the default.

You are taking on this risk of default when you “lend” money to these issuers and in return, there should be a higher yield for the risk that you take on.

The weighted average maturity is 2.56 years and the effective duration is 1.17 years. To compare against this, the figures for the normal iShares $ High Yield Corp Bond UCITS ETF is 3.82 years and 2.96 years respectively.

When inflation was still a big consideration in 2022, the effective duration of near 1 year is appealing for the ETF. The effective duration measures how sensitive the bond/ETF is to changes of interest rate. A rough rule of thumb is that if the effective duration is 1 year, a 1% move in market interest rate will cause a 1% move in the price of the fixed income instrument. If the effective duration is 6 years, then the rough move will be 6%.

Having a 1.17 year duration as compare to a 2.96 years duration (still short!) means the SDHA is less affected by interest rate movement and more by credit defaults.

There is not a lot of difference if we compare the weighted average maturity of both.

This section should give you some idea about the nature of the bonds:

The most odd thing is that second issuer Transdigm. I guess the fixed income might be issue during Covid period because this happen later…

How Did the Short Duration High Yield Corporate ETF did After the Purchase?

Since my investment around Dec 15, the price of the ETF appreciated by about 14%. Just like the price of the ETF:

Since the ETF is denominated in USD, USD was $1.354 then and currently $1.29 now which means it lost 4.7%.

The net returns would be closer to 9.5%.

The chart below shows the performance against the Bloomberg Global Aggregate Bond ETF, which is hedged to USD:

The high-yield ETF is less affected by interest rate movement. Fortunately, there was no credit distress, which would have caused greater damage. The ETF did prove a point that high yield are more levered with equities than bonds.

Each of us experience returns differently because returns of an instrument that has risk is always going to be different.

The following chart show us the performance of the Short Term High Yield ETF against the Global Bond ETF:

There are three areas of performance difference marked #1, #2, and #3.

The first two areas show that the Global Aggregate Bond (purple line) did better than the Short Duration high yield bond. You would have learned a great lesson not to touch high-yield bonds from #2, put more money in a Global Aggregate Bonds, and then proceed to underperform like mad in #3.

I can see that this short duration high yield ETF head down and the Global Aggregate bond head up to reduce the difference deeper into a recession.

If there is a lesson to be learned, it is that the returns and the risks come from the underlying securities.

You get what you buy.

If you buy one high-yield bond, you get the returns and the risks that come with owning one high yield bond.

Conclusion

SDHA has a very short duration, but I wonder if it is right to say that if your time horizon is about 2 years, SDHA is suitable for you to invest your money.

The fact that there is credit risks, and even if not all the portfolio defaults, the value will go down in the short term. What we are hoping is for the ETF to recover within two years.

SDHA has done much better than my $150,000 Global Aggregate Bond position in my portfolio Daedalus, but in hindsight, I know I won’t put 100% in SDHA if I have the opportunity.

Fundamentally, the default rate with SDHA is higher than the global aggregate bond if we look past the default records.

I know there is a line between risk that I don’t want and risk that I would begrudgingly accept.

Taking on some term risks and some credit risks is good enough. Just not excessive term risks.

It might be suitable for some of you thrill seekers.

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