While domestic junk bond exchange traded funds have seen outflows, international high-yield debt has experienced record volumes of inflows over the past year.
Inflows into high-yield bond ETFs are not letting up, with Market Vectors International High Yield Bond ETF (NYSEArca: IHY), gathering almost $50 million year-to-date and over $250 million since it began trading early April 2012.
“The recent flows that we have seen suggest that investors are not giving up on bonds, but they are making a significant change in how they allocate to the asset class,” Market Vectors portfolio manager Fran Rodilosso said in a statement. “Short-term high-yield, emerging markets credit and floating rate funds have gained significant assets during the quarter. At the same time, some U.S.-centric high-yield ETFs have seen fairly large outflows.”
Investors are still on a constant hunt for yield, and the junk bond market is famous for higher yield, along with higher risk. The iShares iBoxx $High Yield Corporate Bond ETF (NYSEArca: HYG) has an asset level of $16.27 billion and costs about 0.50%. Investors have enjoyed a 6.76% yield and the ETF has returned 12.2% for the year. Moreover, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has about $12.50 billion in assets and the 6.83% yield. JNK has given back 12.5% in total returns, reports Zacks. [High Yield Bond ETFs That Protect Against Rising Interest Rates]
“Currently, high yield is already shorter duration than investment grade debt on average,” said Rodilosso. “Many investors remain more comfortable with credit risk than they are with interest rate duration risk, as evidenced by continuing demand for high yield in general.” [High-Yield Bond ETFs va. Dividend ETFs]
The bond ETFs are sensitive to rising interest rates as well as selling pressure. Many investors are on the edge of their seats, anticipating the next move within the bond market. Earlier in the year, JNK and HYG experienced outflows that many took as a signal that the time had come to exit the bond market. However, recent inflows and performance have proved this wrong, while volatility levels have remained low in this sector. [Is the High Yield Bond ETF Party Finally Over?]
Once the U.S. economy gets back on track and into growth mode, interest rates will inevitably rise, which would take away demand for these fixed income instruments. Some analysts have reported that 2013 could be the year for a bond market exodus, but for now the signs do not support this. The U.S. economy still has plenty of fundamentals in need of repair, such as a solid job market and the strength of the U.S. dollar.
Market Vectors International High Yield Bond ETF
Tisha Guerrero 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.