“Meanwhile, Standard & Poor’s Ratings Services expects that the U.S. corporate trailing 12-month speculative-grade default rate will increase to 3.3% by March 2014, from the 2.5% achieved in the 12 months ended March 2013,” he added. “The baseline forecast is partially based on assumptions that the U.S. economy will grow by 2.7% in 2013 and the unemployment will decline to less than 7% by the first quarter of 2014. While a higher default rate is a modest concern, it should be noted that the long-term average default rate in the 1981-2012 period was 4.5%.”
And although junk debt ETF yields are appealing relative to Treasuries, there are elevated risks to be aware of, S&P cautioned. The funds have heavy concentrations in bonds rated BB or lower, for example.
JNK and HYG have durations of roughly five years, so they don’t take on much interest rate risk.
For those seeking high-yield ETFs with shorter durations, PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS) and SPDR Barclays Short-Term High-Yield Bond ETF (NYSEArca: SJNK) can be considered. [High-Yield Bond ETFs for Rising Rates]
“Despite credit spreads, we think ETF investors should still find favorable opportunities in the high yield space,” Rosenbluth said.
Full disclosure: Tom Lydon’s clients own JNK and HYG.