HBRD targets the sweet spot between corporate bonds and preferred securities, capturing higher yields than traditional investment-grade bonds while maintaining more stability than pure equity income strategies. This hybrid approach aims to deliver enhanced income without venturing into junk bond territory.
How It Works
The fund blends traditional corporate bonds with exchange-traded preferreds and other hybrid securities like contingent convertibles (CoCos) and subordinated debt. This mix typically yields 150-200 basis points above comparable duration corporate bond funds by accepting subordination risk. The portfolio maintains investment-grade average credit quality while incorporating select high-yield hybrids for yield enhancement.
Key Features
- Yields significantly more than traditional corporate bond ETFs through hybrid security exposure
- Investment-grade weighted average credit quality despite including subordinated instruments
- More rate-sensitive than dividend stocks but less volatile than preferred-only funds
Risks
- Subordinated securities can lose 30-50% in bank stress scenarios, as seen in 2023 regional bank crisis
- Call risk on preferreds means your best performers get taken away when rates fall
- Hybrid bonds sit below senior debt in bankruptcy, potentially facing total loss before equity
Who Should Own This
Best suited for income investors who've maxed out traditional bond allocations but aren't ready for the volatility of dividend stocks or REITs. Works particularly well for retirees seeking 5-7% yields who understand they're trading seniority for income. Consider 10-20% of fixed income allocation as a yield enhancer, not a core holding.