Investors have pumped over $9 billion into junk bond ETFs so far this year as they take on more risk in their endless search for yield. However, some analysts are worried high-yield ETFs are helping to foster a bubble in speculative-grade corporate debt with insatiable demand pushing yields to record lows.
“As investors continue their quest for yield amidst low interest rates, high-yield ETFs have been playing an increasingly important role in the market for speculative-grade bonds,” according to Standard & Poor’s.
“The demand for fixed-income ETFs has been brisk in recent years,” said Diane Vazza, head of Standard & Poor’s Global Fixed Income Research.
For example, junk bond ETFs gathered $1.6 billion of inflows in September alone, or 4.5% of new speculative-grade bond issuance during the month.
“However, the ease with which investors can enter and exit ETF investments creates new and risky dynamics in the speculative-grade market with the potential flow of ‘hot money,'” Vazza said.
Junk bonds pay higher yields than investment-grade corporates to compensate investors for the risks of owning lower-quality debt. Inflows to high-yield bond funds have climbed to a record this year. [Is It Time to Scale Back on High-Yield ETFs?]
Even though high-yield ETFs have been popular in 2012, the funds have seen outflows in recent weeks amid concerns over the U.S. fiscal cliff and Europe’s debt crisis.