Fixed-income assets stumbled over 2013 as Fed tapering talks stoked rate risk. Nevertheless, high-yield, speculative grade corporate debt exchange traded funds held firm as investors weighed the positive effects of an improving economy.
Junk bonds performed against “a backdrop where the U.S. economy is improving, unemployment is down, there’s a [federal] budget accord, and Europe is calmer,” Sabur Moini, manager of Payden High Income Fund, said in an interview with MarketWatch.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest U.S. high-yield bond ETFs by assets, both gained 5.0% over the past year. In comparison, e iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF), declined 6.6% over the past year as rates on benchmark 10-year Treasury notes moved toward 3% last year. [Junk Bond Issuance Flirts With Record in 2013]
Investors who are wary about rate risk can also take a look at the newer the SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) and iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: SHYG), which have a duration of about 2.1 years, compared to HYG’s 4.08 duration and JNK’s 4.29 duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, and a higher duration corresponds to a greater potential negative return in case of rising rates.
Junk bond ETFs also help cushion the blow from interest rate changes. JNK has a 5.19% 30-day SEC yield, HYG has a 4.90% 30-day SEC yield, SJNK has a 3.79% 30-day SEC yield and SHYG has a 3.55% 30-day SEC yield.
Looking at the speculative grade debt market, company default rates are low and are expected to remain low after the low interest rate environment helped companies refinance at more attractive levels.
For more information on high-yield bonds, visit our high-yield bonds category.