Investors have pulled over $1 billion from the two largest high-yield bond ETFs so far this month as options traders use the funds to make bearish bets against junk debt.
Since the end of October, iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) has seen outflows of $859 million while investors have withdrawn $290 million from SPDR Barclays High Yield Bond (NYSEArca: JNK), according to IndexUniverse ETF flow data.
Also, investors are placing a record volume of bearish short bets on JNK, which is managed by State Street (NYSE: STT), according to Bloomberg News.
The volume of borrowed shares of JNK jumped to 22.8 million on Nov. 16, about three times the average during the past year and up from 9.75 million shares a month ago, the report said.
Borrowed shares of HYG, which is sponsored by BlackRock (NYSE: BLK), rose to 7.4 million on Nov. 16, the most since August.
Traders who are shorting these two high-yield ETFs are hedging, or speculating on further declines in speculative-grade debt. [High-Yield ETFs: Be Sure to Understand the Risk]
High-yield ETFs have been hit this month as the fiscal cliff looms and on worries the U.S. economy may be slipping into another recession. This year, they have been extremely popular with investors trying to boost yield in a low-rate market for bonds.
The junk bond ETFs were up for the third straight session Monday after recently falling below their 50-day moving averages for the first time since June.
Despite the recent outflows from high-yield ETFs, Gary Gordon in an article for the The Street argues the media is exaggerating the exodus from junk bond funds.
“I am not suggesting that diversified high-yield corporate bond ETFs are immune from panicky market behavior,” Gordon wrote. “Expect a genuine exodus to occur if fiscal cliff resolution hopes fade away.”
For the week ended Nov. 14, U.S.-domiciled high-yield mutual funds and ETFs saw outflows of $1.3 billion, HighYieldBond.com reports, citing EPFR Global data.
“That is the largest single negative reading in 24 weeks, and the third-largest single-week outflow in 2012,” according to the report. “However, more than half of this outflow – some $740 million – was ETF influenced. The outflow builds on last week’s $39 million outflow, which was actually mutual fund inflows against an $88 million ETF outflow.”
SPDR Barclays High Yield Bond
Full disclosure: Tom Lydon’s clients own JNK and HYG.