Proshares Short High Yield ETF: Contrarian Investment with Asymmetric Risk-Reward

Bogumil Baranowski of Sicart Associates presented his in-depth investment thesis on Proshares Short High Yield ETF (NYSE: SJB) at Best Ideas 2018.

Proshares Short High Yield ETF is an ETF that seeks a return that is -1x the return of an index for one day (Markit iBoxx US Liquid High Yield Index). It has more than $100 million in AUM.

Bogumil sees it as a compelling contrarian investment in an environment of prolonged easy money policies, high leverage, and excess valuations across most asset classes. As investors and asset holders, we have enjoyed the benefits of an unprecedented monetary experiment: zero interest rates and money printing, leading to increased valuations across most asset classes, and higher leverage across the board. Those tailwinds may be turning into headwinds, and the inverse U.S. high-yield ETF may prove to be one of the most attractive ways to capture this shift.

U.S. high-yield bonds have been among the best-performing asset classes over the last five, ten, and fifteen years, yields are at record low levels, and popularity is historically highest considering the size of AUM in high-yield bond funds and high new inflows. The quality of new high-yield bond issuance has been deteriorating, however. Investors are increasingly desperate for yield and seemingly have no choice but to accept lower quality (and higher risk) for ever-smaller returns.

We have already seen the beginning of a rise in interest rates in the U.S. and shrinking of the Fed’s balance sheet. Also of note are early spikes in yields and early signs of aversion to lower-quality bonds in favor of higher quality. Bogumil sees potential for a meaningful correction in yields and prices, especially in the high-yield bond market.

The inverse high-yield bond ETF may offer attractive upside with limited downside. It’s an investment sensitive to monetary policy decisions. As a result, those developments need to be watched carefully.

About the instructor:

Bogumil Baranowski has a Master’s degree in Finance and Strategy from Institut d’Etudes Politiques de Paris (Sciences Po), and a Master’s in Finance and Banking from Warsaw School of Economics. He has over 12 years of investment experience. Before joining Sicart Associates, LLC, he worked at Tocqueville Asset Management L.P. as a portfolio manager and senior equity analyst. With a European background, his special focus is on consumer sectors, and the broadly defined New Economy. He is the author of Outsmarting the Crowd – A Value Investor’s Guide to Starting, Building and Keeping a Family Fortune (2015). His articles are frequently published on Seeking Alpha. He is an active member of Toastmasters International.

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