High-Yield ETFs Hit Rough Patch
June 7th 2012 at 12:17pm by John Spence
Investors flocking to junk bond ETFs for their attractive yields have been forced to brave some market twists and turns in recent weeks as investors dumped riskier assets.
However, investors in high-yield bond ETFs could be rewarded for riding out the volatility if fears over Europe’s debt crisis subside.
Junk bond ETFs fell sharply in May as yields rose. However, high-yield ETFs have rebounded somewhat in June and the funds were up for a fourth straight session on Thursday. Stock ETFs have also bounced.
The recent flight to safety has pushed Treasury yields to record lows as investors seek out safe havens.
Earlier this week, the spread between junk bonds and Treasuries widened to 7.31 percentage points, the largest gap since the start of 2012, The Wall Street Journal reported.
“Such a big premium in yields presents bond investors with a conundrum. Although the widening premium is a clear signal of investor nervousness, it also indicates junk bonds are looking cheap,” the WSJ reported. “Some investors say they are getting a sense of deja vu: If worries about Europe die down again, then junk bonds could stage a comeback much like they did in the first quarter.”
SPDR Barclays Capital High Yield Bond ETF (NYSEArca: JNK) and iShares iBoxx High Yield Fund (NYSEArca: HYG) are the largest funds indexed to non-investment-grade U.S. corporate debt. [Sell-Off Pushes Junk Bond ETFs to Discounts]
They sport yields of more than 7%, which explains their popularity with investors trying to boost income.
Analysts say high-yield bonds should perform well if a credit event in Europe is avoided, defaults stay low and the U.S. economy continues to grow.
“That’s not to say there won’t be volatility. But if you’re a buy-and-hold investor, you should be happy in five years,” said Andrew Feltus, portfolio manager at Pioneer Investments, in the WSJ article.
iShares iBoxx High Yield Fund
Full disclosure: Tom Lydon’s clients own HYG.
The opinions and forecasts expressed herein are solely those of John Spence, 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.