ETF Spotlight: High-Yield Corporate Bonds
April 23rd 2012 at 9:00am by Tom Lydon
ETF Spotlight on iShares iBoxx $ HY Corp Bond Fund (NYSEArca: HYG), part of an ongoing series.
Assets: $14.2 billion.
Objective: The iShares iBoxx & High Yield Corporate Bond Fund tries to reflect the performance of the iBoxx $ Liquid High Yield Index, which is comprised of liquid U.S. dollar-denominated, high-yield corporate bonds.
Holdings: The fund holds high-yield corporate bonds with non-investment grade, speculative or junk ratings.
What You Should Know:
- BlackRock‘s iShares ETF division sponsors the fund.
- HYG has an expense ratio of 0.50%.
- The fund holds 519 securities and the top ten holdings make up 7.4% of the overall portfolio.
- Sector allocations include: consumer staples 15.8%, financials 11.9%, telecommunication 11.1%, oil & gas 11.0%, industrials 10.3%, health care 9.5%, technology 9.0%, utilities 8.3%, basic materials 4.9%, consumer goods 4.8% and other 3.4%.
- S&P credit ratings include: AA+ 1.4%, BBB- 0.5%, BB+ 13.2%, BB 11.0%, BB- 18.1%, B+ 11.6%, B 16.4%, B- 12.4%, CCC+ 5.8%, CCC 5.2%, CCC- 0.6%, CC 0.5% and C 0.4%.
- The fund has an average maturity of 5.17 years and a weighted average coupon of 8.08%.
- HYG offers a distribution yield of 7.17%.
- The ETF is up 0.1% over the past month, up 2.9% over the last three months and up 5.5% over the past year.
- The fund is 1.3% above its 200-day exponential moving average.
- “We consider investing in high-yield corporate bonds to be similar to investing in the equities of companies with highly leveraged balance sheets,” according to Morningstar analyst Timothy Strauts.
- “With increased leverage comes the increased probability of default and bankruptcy,” Strauts added. “In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk.”
- “On a trailing 12-month basis, the current high-yield default rate is only 1.7%. This is a very low rate and almost all of the defaults that are occurring are in the lowest-rated CCC bonds,” Strauts said.
- HYG competes directly with the SPDR Barclays High Yield Bond (NYSEArca: JNK). [ETF Spotlight: High-Yield Bonds]
The Latest News:
- Heightened volatility and tough trading conditions stemming from the Eurzone is making the high-yield bond market vulnerable to negative news, reports Serena Ruffoni for The Wall Street Journal.
- “There is a sense of apprehension amongst investors; some fear has returned,” Suki Mann, head of credit strategy at Société Générale, said in the article. “And the high-yield bond market, with its intrinsic volatility and dependence on the economic cycle is the first one to feel it.”
- “Investors’ attitude right now is best summed up as hopeful anxiety. Markets are jumpy and sentiment changes rather quickly.” Sohail Malik, senior portfolio manager at European Credit Management, said.
- JP Morgan strategists are being more cautious and turning “tactically neutral” in high grade, high yield and emerging market corporate bonds, reports Michael Aneiro for Barron’s. [Investors Cool on High-Yield Bond ETFs]
iShares iBoxx $ HY Corp Bond Fund
For past stories in this series, visit our ETF Spotlight category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.