If you're an income investor you have to consider the risks of the funds in which you invest. The purpose of this article is to review one such high income fund, not to advise you whether to buy the fund or not. Our goal is to show you the risks so that you'll be able to look at the fund's key information document, and say "Yes, given these risks I think that's a great investment", or you might think "I only get this much return for that much risk - no way!". Also, by the time you come to look at this video, the return may be quite different because the price may have moved up or down, so really it makes no sense for me to talk about return. Risk on the other hand is fairly stable, that won't have changed much by the time you read this.

Remember this is not a recommendation. If you want to know whether this fund is suitable for you seek independent financial advice.​

So let's take a look at the risks of the STHS fund. You're looking for a fund which generates income, the higher the income the better but, as with everything in life, there's a drawback. The drawback is the relationship between risk and return. If we take a low risk we'll get a low return. Cash in your bank account has the lowest risk, but if we count the effect of inflation cash returns are currently negative. Unfortunately if we take a high risk that doesn't guarantee a high return: high risk also comes with a higher probability of incurring a high loss so let's bear that in mind when we look in detail at this exchange traded fund.

It has the snappie title: "PIMCO short- term high yield corporate bond index Source UCITS ETF (sterling hedged)". We prefer to use its ticker: STHS. It's a passive fund so it simply tracks an index in this case a Bank of America Merrill Lynch index. It's a credit index which means that tracks US corporate bonds and the maturity of those bonds is between zero and 5 years. Some bonds can have lifetimes of up to 30 or 50 years so zero to 5 years is very short duration, and as we'll see that's very important for risk because it means the fund has lower interest rate sensitivity.

The index it tracks is a US corporate bond index. That means that the assets which the fund buys will be based in the US. So you might think that as the value of the U.S. dollar strengthens and weakens versus the pound it would affect a value of our fund but we'll see later on that that's not the case and the magic words for an income investor are "high yield". Because the bonds in the index have a low credit quality that means that they come with a higher risk of default or bankruptcy they compensate the investor with a high return.

So we know that this fund will be buying US short-duration junk bonds. The fact sheet also gives us the key risks. There's no capital protection so in theory you could lose your entire investment, although that's very unlikely, but you could certainly make a capital loss. Because it's investing in bonds we know that the value of those bonds will be affected by the level of interest rates. You can think of it as the seesaw: as the level of interest rates rises the value of bonds goes down, and although having short duration mitigates that effect the risk doesn't go away completely.

Exchange rates could also be a problem. If we buy dollar-denominated bonds and the dollar weakens versus the pound then when we convert the value back into sterling the value of those assets would fall. Of course, it could work both ways. If the dollar strengthens then that would increase the value of our fund. But as well as volatility from interest rates and changes in credit quality we may also have to consider the volatility that's added by currency fluctuations.

So what's the volatility of the fund? Remember volatility is just the typical annual change in price of the fund. A larger volatility means a greater capital risk. In the case of STHS the volatility's six point one percent. That may not mean anything to you until we put it in context. Over the same period the volatility of sterling versus the US dollar was twelve percent, almost twice as much. The volatility of gold was fourteen percent, the FTSE 100 was fifteen percent and oil was almost forty percent. So you can see that a volatility of 6.1 percent is quite low.

If you're of a suspicious disposition, which you should be as an investor, you should be asking yourself: why is the volatility so low? One of the primary reasons is the short duration of the fund. Imagine we buy a bond. We pay a hundred pounds today, that's the downward arrow, the lifetime of the bond is two years which means we get two coupons of three percent per year, and in the second year we receive our money back, our hundred pounds. Those are the cash flows you get when you buy a two-year three percent bond. But let's say the day after the bond is issued the yield jumps to four percent, but not for you because the coupons are frozen into the bond. The income is fixed forever. While everyone else is getting four percent your coupon will be frozen at three percent and it'll be frozen at that level for two years. That means you lose out on one percent for two years, or two pounds. As the yield jumped up the price of your bond would fall down by two pounds. It would fall to 98 pounds.

Let's say on the same day you bought a three-year three percent bond. Again, the day after the bond's issued the yield jumps to four percent but instead of losing one percent for two years you've lost one percent for three years, which is three pounds, and the price of your bond will fall from a hundred pounds to 97 pounds.

And that's why the longer the lifetime of a bond the longer your income is frozen at that level, and that makes the price of your bond more sensitive to interest rates. So, to summarize, if interest rates are rising reduce the duration of your investments, and of course at the moment the Federal Reserve is raising interest rates so that risk is very salient at this time.

Another reason that the volatility is low is that this fund its currency hedged. We're not referring to shrubbery, a hedge in financial jargon, is a way of reducing risk. The fund manager will buy a derivative that takes away the currency fluctuations. They'll pay a fee for that hedge and that fee will be passed on to you in the management fee of the fund.

In fact there are two versions of this fund: one which is hedged and one which isn't. The unhedged fund has a volatility which is twice that of the hedged fund. Sometimes the volatility will work in your favour so you can see that during Brexit devalued versus the dollar and that gave a significant boost to the value of the fund but only the one which is unhedged. Of course it could equally well go the other way. So say news breaks that we're going to have soft Brexit, sterling could quite easily strengthen by thirty percent and the unhedged fund would lose that thirty percent but the hedged fund wouldn't and that's why your capital risk will be lower the lower the volatility.

We'd also try and avoid funds which are too small. If we look at the Source website it gives the assets under management for this fund. It's about eight hundred and sixty million pounds. Because the fund is very large it's very unlikely that it will close. For funds with a value of less than about 20 million that has to be concern, but it's certainly not a concern here.

As with any credit fund liquidity is a risk. What do we mean by liquidity? Well it's just the time taken to sell your assets. Now the fund itself is an exchange-traded fund. If there's a crisis it can mean real problems for the fund manager because the time taken for an ETF investor to sell their holding might be as little as 10 seconds. But, as people take their money out, the fund manager has to sell bonds and it'll take a lot longer than 10 seconds to do so. During a credit crisis it may take days or even weeks to sell the bonds and that means the value of the bonds can get completely out of sync with the value of the exchange-traded fund. So although a credit ETF seems liquid under the hood and in a crisis it may not be liquid at all.

And one place where this fund doesn't look so great is its fees. The ongoing charges for the fund are point six percent. The fee of point six percent means that if you invest 10,000 pounds you'll have to pay 60 pounds per year to the fund manager. For a passive fund you should expect to pay around 30 pounds per year but credit funds do tend to be a little bit more expensive, and remember we do have that currency hedge which we have to pay for.

So in terms of our ETF checklist:

• High Income: The fund certainly provides a good income, I'll show you how to check that in a second.
• Low Volatility: The volatility is low because the duration of the fund is low and because of the currency hedge.
• Low Fees: The fund doesn't have low management fees, point-six percent is fairly expensive.
• Large Size: It is a large fund so it's unlikely to close and it benefits and the economies of scale.
• High Liquidity: We do have to be worried about the liquidity of the bonds which are in the fund.

Now one of the things I didn't talk about was the yield of the fund. When you watch this video it will probably be quite different, and it is easy to check it for yourself right now. Go to the Morningstar website, search for "STHS", and if you scroll down you'll see that the 12-month yield as I write is 5.49 percent. As the price of the fund fluctuates that yield will vary quite a lot but at the time of writing STHS has a pretty good yield.

Do you invest in high-yield credit but do you think the risk reward is fair? Maybe we missed some of the risks? We'd love to know what you think.