Despite some second-quarter headwinds at the hands of a tapering-induced spike in interest rates, major junk bond exchange traded funds look poised to close 2013 in the green.
With rate concerns on the back burner, junk bond investors’ focus is back on credit risk, but speculative grade debt default rates are still relatively low. Low default rates have not only helped keep investors engaged in high-yield bond ETFs, but those lower rates of default have also set the table for a flood of new issuance. [Interest Rate vs. Credit Risk With Junk Bond ETFs]
“U.S. junk bond issuance in 2013 totaled $324 billion, the second-largest yearly figure ever, behind the unprecedented $344 billion logged in 2012,” according to S&P Capital IQ/LCD. “The high yield market ended 2013 on a relatively active note, with roughly $22 billion in volume during December.”
S&P Capital IQ that refinancings accounted for half that volume, highlighting the fact that the Federal Reserve’s low interest rate policies are benefiting corporate borrowers.
“Yields on junk bonds finished the year atop 7% (7.03% to be precise). That number is the average new-issue yield on all high-yield issues completed over the last 30 days. It is up from the 6.75% yield recorded at the end of November,” according to the research firm.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest U.S. high-yield bond ETFs by assets, are each up 5.5% this year. Rising interest rates have led to increased focus on rate risk and investors favoring short duration, helping the SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) to a 6.2% gain.
Although actively managed ETFs still represent just a sliver of the overall ETF universe, junk bonds are one corner of the investment world where active management has worked in investors’ favor.
The AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) met the challenge of rising rates with aplomb, soaring 11.2% this year.
Chart Courtesy: S&P Capital IQ
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and JNK.