The two largest high-yield bond ETFs alone have pulled in nearly $8 billion of fresh assets this year as investors clamor for income in a low-interest-rate environment.
In fact, trading in high-yield ETFs is rising at a faster rate than transactions in the underlying junk debt “as buyers seek a faster way to take advantage of a market returning 15.5%this year,” Bloomberg News reports.
Year to date, iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) has seen net inflows of $4.6 billion while SPDR Barclays High Yield Bond (NYSEArca: JNK) has hauled in $3 billion, according to IndexUniverse data.
The funds are paying 30-day SEC yields of more than 5% while yields on 10-year Treasury notes are hovering around 1.8%.
“Speculative-grade bond ETFs are attracting record amounts of cash this year as Federal Reserve efforts to stimulate the economy by holding interest rates at almost zero since 2008 push investors into riskier assets,” according to Bloomberg. “Bond buyers from retirees to the biggest banks are increasingly using shares of high-yield bond ETFs for fast access to debt with an annualized return of 21.8% since 2008, even as the risk of losses tied to rising interest rates is the greatest since 2007.” [Investors Bet Against Junk Bond ETF]
After such a strong run, high-yield bond prices have risen so much and yields pushed so low that there are worries investors buying now aren’t being adequately compensated for holding speculative-grade debt. [High-Yield ETFs Rallying to Cap Historic Year]
According to fixed-income portfolio manager David Schawel, the spread between junk-bond yields and the S&P 500 earnings yield recently turned negative for the first time ever, “showing just how much the yields on high-risk bonds have come down as central banks keep benchmark borrowing rates depressed and investors search further out on the risk spectrum for yield,” Business Insider reports.