Investors have piled into high-yield bond ETFs this year. However, investors stretching for yield need to be aware of the liquidity-related risks of this sector.
The two largest ETFs for this asset class are the $15 billion iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG) and the $10.9 billion SPDR Barclays Capital High Yield Bond ETF (NYSEArca: JNK).
Year to date through the end of June, HYG gathered net inflows of $3.8 billion while investors shoveled $1.6 billion into JNK, according to data from the ETF Industry Association.
It’s not surprising that speculative-grade debt ETFs have been popular with 10-year Treasury notes yielding a paltry 1.5%. JNK has a 30-day SEC yield of 6.8% while HYG offers 6.5%.
However, high-yield bond ETFs have hidden dangers investors should consider. Specifically, the funds can trade at a premium or discount to net asset value. [High-Yield ETFs Hit Rough Patch]
“When many investors seek to buy, the ETF shares can sell for a premium to the value of the assets in the fund. During hard times, the shares can trade at a discount,” writes Stan Luxenberg at TheStreet.com. “Funds that hold highly liquid assets, such as the stocks of the S&P 500, rarely trade at big premiums or discounts. But the price of high-yield funds can vary.”