Investors Flocking to High Yield Bond ETFs

March 13th at 4:18pm by Tom Lydon

High-yield, speculative-grade debt traders traditionally tapped into fixed-income assets over the phone, but with the advent of exchange traded funds, more are turning to the investment vehicle as their go-to source for junk bond exposure.

Assets in the top 10 junk bond ETFs have expanded 24% since May 2012, reports Lisa Abramowicz for Bloomberg.

“The ETFs allow me to go into markets that are harder to get into,” Bill Larkin, a fixed-income money manager at Cabot Money Management Inc., said in the article. “I’m trying to manage risk using ETFs.”

Consequently, ETFs are exerting greater influence on trades when new corporate bond sales slow. For instance, George Bory, head of credit strategy at Wells Fargo, pointed out that over 75% of the 200 most actively traded bonds in February were among ETFs’ holdings, notably the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG). [Credit ETFs See Stout Inflows]

ETF bond holdings “are often first movers when the high-yield market pulls back or rallies,” Wells Fargo analysts said in a recent report.

However, Stephen Laipply, a BlackRock product strategist who focuses on fixed-income ETFs, argues that the ETFs, due to their transparent nature, only sheds light on price swings in more frequently traded securities.

Nevertheless, most fixed-income investors are turning to ETFs because the investment vehicle provides easier and quicker access to the relatively illiquid bonds market, according to Greenwich Associates. Volume in the broader high-yield bond market has increased 69% since 2008, whereas junk bond ETFs have seen trading volumes surge 800%.

Investors interested in high-yield bond ETFs can take a look at other options like the rival SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS) and the actively managed AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD). [Bond ETFs: The New Black]

However, advisors are beginning to weigh the risks of a rising rate environment on high-yield bonds.

“Our bigger concern is what happens when expectations change,” Mirko Mikelic, a senior money manager at ClearArc Capital Inc., said in the article. “When rates rise you’re going to see people exiting ETFs and you’re going to see the Street not trading as much. What happens when everyone tries to exit the theater at once?”

Alternatively, investors can take a look at the newer 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 2.11 and 2.18 years, respectively, compared to HYG’s 3.93 duration and JNK’s 4.13 duration.

For more information on speculative grade debt, visit our junk bonds category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own shares of HYG, JNK, HYLD.

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.