Ten-year Treasury yields have soared 49% this year, inflicting damage on an array of long- and some medium-duration bond exchange traded funds in the process.
Said another way, long duration Treasury and high-grade corporate bond ETFs have been whacked by rising rates. As Treasury yields have spiked, investors have not been shy about pouring cash into short- duration bond funds. By making that move, some investors are sacrificing yield when they do not have to because, for the risk-tolerant, there are short-duration bond ETFs that offer above-average yields. [Short-Duration Bond ETFs See Inflows Surge]
“To identify appealing high-yielding securities remains a top priority for many investors,” said Todd Rosenbluth, S&P Capital IQ’s director of ETF and mutual fund research, in a recent research note.
As Rosenbluth points out, investors have put $2 billion into junk bond ETFs since October, but some newer high-yield bond funds can offer investors protection should rates again rise in earnest.
If rates move up by one percentage point, from say 3% to 4%, the price of a bond fund with an average duration of 5 years will move down by 5%, while a bond fund with an average duration of 10 years will move down by about 10%, according to S&P Capital IQ. [Many Investors Don’t Understand how Rising Rates Kill Bonds]
Although a big jump in interest rates is not expected until this year, investors should begin evaluating of the ETFs that offer both decent yields and buffers against rising rates. That group includes the PIMCO 0-5 Year High Yield Corporate Bond ETF (NYSEArca: HYS), which S&P Capital IQ rates marketweight.
HYS is two and a half years old and has clearly benefited from investors’ thirst for high-yield, low duration fare. The ETF has a 30-day SEC yield of 3.2%, or about 50 basis points above 10-year yields, with an effective duration of 1.97 years, two factors that have helped it amass over $3.5 billion in assets since its June 2011 debut. [Another Look at High-Yield Bond ETFs]
HYS has a direct competitor in the form of the SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK). SJNK is slightly newer than HYS with a March 2012 debut date, but the short-duration equivalent of the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) already has almost $2.9 billion in AUM and boasts a 30-day SEC yield of 3.92%, according to State Street data.
SJNK has a modified adjusted duration of just over two years and an annual expense ratio compared to 0.55% on HYS. SJNK is rated underweight by S&P Capital IQ.
S&P Capital IQ also has an underweight rating on the PowerShares Global Short Term High Yield Bond Portfolio (NYSEArca: PGHY). However, it should be noted that S&P Capital IQ has an overweight rating on PGHY’s holdings and liquidity, both of which are critical in assessing a fund such as PGHY that has significant global exposure. [Fight Rising Rates With an International Short-Duration ETF]
PGHY is the newest of the ETFs mentioned here having debuted in June, but that should diminish its allure. More than half of the fund’s geographic weight is allocated to the U.S. and 75% of its 135 holdings are rated BBB, BB or B, according to issuer data.
PGHY’s low effective duration of 1.36 years helps the fund cope in a rising rate environment and its fees are just 0.35% per year. Notably, the rookie ETF has outpaced more conservative U.S.-focused short-duration ETFs as well as high-grade corporate and emerging markets bond funds since coming to market. [New Junk Bond ETF Deserves More Attention]
SPDR Barclays Short Term High Yield Bond ETF
Tom Lydon’s clients own shares of JNK.