Two High-Yield Bond ETFs for Rising Rates

April 22nd at 8:58am by Tom Lydon

Investors want yield but are concerned they could get hurt if interest rates rise. High-yield corporate bond ETFs with shorter durations provide a nice balance.

Options here include PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS), which has attracted a little over $1 billion in new assets year-to-date.

SPDR Barclays Short-Term High-Yield Bond ETF (NYSEArca: SJNK) is another fund to consider, and has brought in $539.2 million, according to IndexUniverse.

HYS has a 0.55% expense ratio and SJNK has a 0.40% expense ratio. [PIMCO Short-Duration, High-Yield ETF Rakes in Cash on Rate Fears]

“Looking for income and yield is a popular investment theme. The question is when will rates rise,” David Mazza, head of ETF investment strategy, Americas, for State Street Global Advisors, said in an interview. “Some investors are managing interest-rate risk by using ETFs with shorter durations such as SJNK.”

HYS has an effective duration of 1.87 years and comes with a 3.42% 30-day SEC yield. SJNK has an adjusted duration of 2.04 years and comes with a 4.17% 30-day SEC yield.

Bonds with shorter durations are less sensitive to changes in interest rates.

The largest junk bond ETFs are SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) and iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG). These ETFs have longer durations and both have experienced net outflows year to date. [High-Yield ETF Sees Nearly $400 Million One-Day Outflow]

JNK has an adjusted duration of 4.11 years and a 5.05% 30-day SEC yield. HYG has an effective duration of 3.84 years and a 4.86% 30-day SEC yield.

ETFs have been a great way for investors to easily access speculative grade debt.

“High-yield ETFs are being used more by institutional investors as well as traders such as hedge funds,” Mazza said. “They’re cost effective, transparent and index-based. Some investors are using JNK rather than purchasing individual securities/bonds. New regulations such as Dodd-Frank and Basel III put restrictions on a bank’s ability to own or trade certain bonds.”

Looking ahead, junk bond ETFs will continue to have a place in an investor’s portfolio.

“The appeal of high-yield bonds is that the economy is slowly improving, and corporate balance sheets and cash flows are healthy,” Mazza added.

For more information on high-yield fixed-income funds, visit our high-yield bonds category.

Max Chen contributed to this article.

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

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.