UPDATE 2-New ProShares ETFs focus on credit of junk bond issuers

Thu Aug 7, 2014 5:38pm EDT

(Updates with Lipper data on high-yield bond fund outflows)

By Ashley Lau

Aug 7 (Reuters) - Investors looking to bet on the credit of issuers in the high-yield bond market can do so now with the launch of two exchange-traded funds, the first of their kind, backed by credit default swaps.

The ETFs, which began trading on Thursday on the BATS exchange, provide exposure to the credit of North American high-yield debt issuers. They launch at a time when high-yield junk bonds have been falling out of favor, with investors in U.S.-based funds pulling $7.1 billion out of high-yield bond funds in the week ended Aug. 6, their biggest outflows on record, according to data from Thomson Reuters' Lipper service.

For investors in the high-yield bond market, the new ETFs - the ProShares CDS North American HY Credit ETF and the ProShares CDS Short North American HY Credit ETF - could offer a way to manage credit risk, said Dave Nadig, chief investment officer of ETF.com, a research and analytics firm based in San Francisco.

"The credit default swaps market exists as a way of offsetting risk for high-yield bond investors," he said.

The TYTE ETF, which provides long exposure to the credit of high-yield issuers based in North America, could be used by an investor who is expecting economic conditions to improve and spreads to tighten, said Steve Sachs, head of capital markets at Proshare Advisors LLC.

The WYDE ETF, on the other hand, which provides short exposure to the credit of North American issuers, could be used by someone who sees economic conditions deteriorating with credit spreads widening, he said.

"The idea is to give pure exposure to simply the credit aspect of the fixed-income market, effectively removing all interest-rate risk and being really only long or short the actual credit component of the fixed-income market," Sachs said in an interview.

With these two new listings, ProShares, a provider of alternative exchange-traded funds, now has a total of seven ETF listings on the exchange run by BATS Global Markets, the second-largest U.S. exchange operator by volume.

Nadig said the ETFs will likely be used by a more narrow, specific audience of institutional investors, rather than a broader retail crowd.

"If you're somebody who is making lots of investments around the credit spectrum, these can be great little tactical tools for fine-tuning your exposures," Nadig said. "It's a great tool for folks looking for this kind of hedging exposure." (Reporting by Ashley Lau in New York; Additional reporting by Neha Dimri in Bangalore; Editing by Leslie Adler and Andre Grenon)

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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