ETF Spotlight: High-Yield Bonds | ETF Trends

As yields on traditionally safe Treasury bonds hover around historic lows, investors have turned to high-yield exchange traded funds to meet their income needs. However, industry observers caution that the returns may not perfectly reflect the ETFs’ benchmark indices.

Some observers believe that high trading costs and market inefficiencies could cause high-yield ETF returns to be lower than their mainstream high-yield bond index counterparts, reports Steve Johnson for the Financial Times. [High-Yield ETFs for Investors Seeking Income]

“Bonds go in and out of the high-yield benchmarks far more often than stocks go into and out of the S&P 500, so ETF managers are forced to trade more in the high-yield bonds that make up the index,” Douglas Peebles, chief investment officer at Alliance Bernstein, said in the article.

“Virtually all trading in fixed income is done off exchange and pricing in the junk bond market is relatively opaque, which gets reflected in bid/offer spreads,” Peter Sleep, portfolio manager at Seven Investment Management, said in FT report. “However, the benchmark indices do not reflect these frictional costs and so are hard to beat.”

Lipper data reveals that the average high-yield ETF has underperformed its index by 0.46% a month over the past five years, or 5.52% per year.

According to BlackRock, high-yield ETFs have brought in $6.6 billion so far this year, compared to $8.4 billion over 2011. The iShares iBoxx $ HY Corp Bond Fund ETF (NYSEArca: HYG) saw inflows of $3.1 billion year-to-date and the SPDR Barclays Capital High Yield Bond ETF (NYSEArca: JNK) attracted $2.6 billion. [ETF Spotlight: High-Yield Corporate Bonds]