Yield Chasers Starting to Flee Junk Bond ETFs

November 14th at 2:01pm by John Spence

Investors stretching for yield have flocked to junk bond ETFs this year but now the flows are starting to reverse as the funds drop below their 50-day moving average for the first time since June on worries over the economy and U.S. fiscal cliff.

So far in November, investors have pulled $458.7 million from iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and $107.7 million from SPDR Barclays High Yield Bond (NYSEArca: JNK), according to IndexUniverse data.

In fact, HYG saw record outflows on Tuesday with high-yield ETFs on track for their first down month since May, Bloomberg News reports.

Investors yanked $218.9 million from the BlackRock-managed fund yesterday, the biggest daily withdrawal in the five-year history of the largest high-yield ETF.

“The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam,” Bloomberg reports.

U.S. junk bonds were up about 13% year to date through October.

‘Looking tired’

Junk bond ETFs invest in speculative grade corporate debt and carry higher yields to compensate investors for the risk. They have appealed to investors seeking income in a low-interest-rate environment.

Although high-yield ETFs have been popular this year, there are signs investors are growing wary of the asset class. [High-Yield Investors Moving Into Bank Loan ETFs]

Some analysts are worried high-yield ETFs are helping to foster a bubble in speculative-grade corporate debt with strong demand pushing yields to record lows. [‘Hot Money’ Drives Junk Bond ETF Yields to ‘Surreal’ Lows]

Meanwhile, fears over an earnings slowdown and possible recession in the wake of the presidential election could be hurting high-yield ETFs after their strong rally.

“Just as the stock market rally suddenly is looking tired and vulnerable, the surge in prices for riskier corporate debt appears to have run its course. The space is probably a victim of its success as much as it is endangered by an uncertain time ahead, analysts say,” reports Jeff Cox at CNBC.com.

However, the alternatives in bond ETFs aren’t very attractive with 10-year Treasury notes yielding a paltry 1.6%.

“There’s been a lot of verbiage from various big gurus saying high yield is overvalued, don’t touch it with a 10-foot pole,” said Marilyn Cohen at Envision Capital Management in the CNBC story. “My counter to that is, ‘All right, so you’re going to sit in cash or T-bills or corporate bonds, which are trading at lower yields than Treasurys.’”

iShares iBoxx High Yield Corporate Bond

Full disclosure: Tom Lydon’s clients own HYG and JNK.

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.

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