High-yield corporate bond ETFs have been immensely popular but yields have been pushed so low that newcomers may not be getting adequately compensated for the risk of investing in speculative-grade debt.
The recent pullback in high-yield ETFs appears to have shaken out at least some of the “hot” money.
The iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest funds in the category, have experienced net outflows of $731 million and $514 million, respectively, so far this year, according to IndexUniverse data. The ETFs are paying 30-day SEC yields of about 5%.
The outflows aren’t significantly large when considering how big these ETFs are, and the massive inflows they’ve attracted over the past year from yield-starved investors. [High-Yield Bond ETFs: Rush for the Exits?]
Still, there are worries about how much gas is left in the tank for high-yield bonds after such as strong run. The junk debt ETFs posted total returns well over 10% last year.
“Prices are now near all-time highs and yields near all-time lows,” Schwab analysts wrote in a recent commentary. “We think it will be difficult to continue the strong performance going forward. In fact, we think there are increased risks in the high yield market, and believe investors should be cautious when investing in the asset class.”
‘Return expectations must be tempered’
Moody’s recently warned that junk bond covenant quality fell to an all-time low in January.
However, the dilemma for investors is that there simply aren’t many alternatives for yield with the Federal Reserve committed to keeping short-term interest rates near zero. They’re being forced to take on more risk in search of income, hence the popularity of junk bonds and other high-yield sectors.