Investors are selling high-yield ETFs after a strong run and moving into investment-grade corporate bond funds to cut risk in their fixed-income portfolios, according to industry flow data.
In the past week, iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) have both seen outflows of more than $200 million.
Meanwhile, investors have added over $300 million to iShares iBoxx Investment Grade Corporate Bond (NYSEArca: LQD), according to IndexUniverse data.
Another investment-grade ETF, Vanguard Short-Term Corporate Bond (NYSEArca: VCSH), has seen inflows of $417 million since the end of September.
The recent buying and selling patterns in corporate bond ETFs suggest investors are moving toward a risk-off attitude in fixed-income.
High-yield ETFs have been extremely popular this year with investors desperate for income in a low-rate market for bonds. HYG and JNK, the two largest ETFs in the category, are paying 30-day SEC yields of nearly 6%. They have delivered total returns of more than 15% the past year. [Is It Time to Scale Back on High-Yield ETFs?]
LQD, the investment-grade corporate bond fund, offers a 30-day SEC yield just shy of 3%. Junk bond ETFs pay higher yields to compensate investors for the risk of holding speculative-grade debt.
“We consider investing in high-yield corporate bonds to be similar to investing in the equities of companies with highly leveraged balance sheets,” says Morningstar analyst Timothy Strauts.
“With increased leverage comes the increased probability of default and bankruptcy. In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk,” he adds.
Blowing bubbles
However, some fund managers are warning the rally in junk debt has pushed yields to record lows and that the bonds may not be worth the risk, the Financial Times reports.