High-yield ETFs that invest in speculative-grade corporate debt have raked in cash in 2012 and risen to one-year highs. However, a spike in defaults last month is a reminder of the sector’s risks.
The spread or yield differential between high-yield bonds and Treasuries continues to narrow as investors take on more risk, according to BondSquawk.
The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) have posted total returns of more than 8% year to date. They are both offering 30-day SEC yields of around 6%. [Are High-Yield Bond ETFs in a Bubble?]
“Despite the stellar outperformance, the fundamentals are painting a different picture as default activity in August was high,” BondSquawk reports. “August was an active month as four High Yield companies defaulted totaling $2.14 billion. This surge in defaults surpasses July’s volume as only two companies defaulted totaling $381.8 million while no High Yield companies defaulted in June.” [PIMCO High-Yield Bond ETF]
High-yield ETFs have been big sellers all year. For example, in just the last month, JNK has pulled in $366 million, according to XTF.
However, higher yields come with higher risks.