Fed Speak Reignites Love for Big Junk Bond ETF

June 5th at 8:00am by Tom Lydon

Buoyed by expectations that higher interest rates are not an imminent scenario, investors are returning to some of the largest high-yield bond ETFs even as yields drop.

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), the largest junk bond ETF by assets, pulled in $539 million worth of new assets last week, or almost 79%, of inflows to all bond ETFs over the same period, reports Sridhar Natarajan for Bloomberg.

Low interest rates are tempting investors to embrace riskier bonds in search of yield. Last month, the yield gap between junk bonds and U.S. Treasuries has narrowed, with the difference between Treasury yields and CCC-rated debt at 6.97 percentage points, the lowest since November 2007. [Investors Flock to Riskier Bonds, Debt ETFs]

Since May 28th, HYG and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the second-largest junk bond ETF, have pulled in $425.4 million and $41.5 million, respectively. Those inflows represent modest reversals of the outflows from the two ETFs earlier as investors moved into lower duration junk bond funds. HYG is still lighter by $1.6 billion this year.

According to Standard & Poor’s Ratings Service, default rates on low-rated corporate borrowers was 1.7% in April, slightly higher than the six-month low of 1.57% in March.

The actively managed AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) has seen its assets under management tally more than double this year. HYLD has pulled in $569.1 million in new assets, helping the ETF enter the $1 billion in AUM club, as investors have warmed to the fund’s lower duration but still meaty yield. [Peritus High-Yield ETF Tops $1B in AUM]

HYLD has a 30-day SEC yield of 7.74% with a duration of just 2.39 years compared to a duration of 3.61 years on the Barclays U.S. High Yield Index, according to AdvisorShares data. HYG has a 30-day SEC yield of 4.29% and an effective duration of 3.96 years.

The PIMCO 0-5 Year High Yield Corporate Bond (NYSEArca: HYS) and the SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) have pulled in more than $2.7 billion in new assets this year, more than the amount shed by HYG and JNK combined.

The $5.1 billion HYS has an effective duration of 1.93 years while SJNK’s modified adjusted duration is 2.21 years. Lower durations on those ETFs make them less sensitive to potential interest rate changes than longer duration rivals like HYG and JNK. [Short Duration Junk ETFs in Focus]

iShares iBoxx $ High Yield Corporate Bond ETF

hyg

ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG, HYLD and JNK.

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.