With yields on 10-year U.S. Treasury notes uncomfortably high for some, investors have not been shy about pulling cash from high-yield bond ETFs such as iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) and the SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) in search of bond funds with lower duration.
Many investors are on the edge of their seats, anticipating the next move within the bond market. Earlier in the year, JNK and HYG experienced outflows that many took as a signal that the time had come to exit the bond market. [Junk Bond ETFs Still Attracting Yield Hunters]
Investors appear similarly skittish about ETFs that hold investment-grade corporate bonds, such as the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD). In mid-March, LQD had $24 billion in assets under management, making it the largest corporate bond ETF. It still is, but its AUM total has dwindled to $21.8 billion. [IG Corporate Bond ETF Yields 4%]
Investors speculating that interest rates are poised to jump has hastened departures from bond ETFs with what are perceived as durations that are too high. LQD has an effective duration of 7.72 years while the rival SPDR Barclays Long Term Corporate Bond ETF (NYSEArca: LWC) is even more sensitive to rising rates with a modified adjusted duration of nearly 13.7 years.
Outflows from that pair have been stunning in recent weeks. LQD has lost $940 million in assets since May 1. LWC has lost just $4.11 million, according to Index Universe data, but consider that LWC has less than $110 million in AUM and $4.11 million out the door in six weeks is arguably a big deal.
The outflows have corresponded with glum performances for high-grade corporate bond ETFs. For example, LQD is down 4.3% since May 1 while LWC, almost certainly due to its longer duration, has been over 200 basis points worse over the same time.
Active traders can profit from departures from investment-grade corporates with the obscure ProShares Short Investment Grade Corporate (NYSEArca: IGS). IGS seeks to deliver a performance that “correspond(s) to the inverse (-1x) of the daily performance of the Markit iBoxx $ Liquid Investment Grade Index,” according to ProShares. That is the same index tracked by LQD.
While IGS is not the most heavily traded bond ETF on the market (average daily volume of just 1,600 shares), the fund has a done a good job of accomplishing its objective since early May. With LQD down 4.3% since May 1, IGS has gained 4.5% over the same time. Currently trading around $32.30, IGS resides at its highest levels since February, indicating that this could be a good short-term play on outflows from high-grade corporate bond ETFs.
ProShares Short Investment Grade Corporate
ETF Trends editorial team contributed to this report. Tom Lydon’s clients own shares of LQD.