More income investors are beginning to look into European speculative grade bond related exchange traded funds, as investors in Europe pick up high-yield debt at a record pace.
According to Dealogic, high-yield corporate debt issuers in Europe have sold a record €18.5 billion, or $26 billion, euro-denominated bonds since January, up 17% year-over-year, reports Ben Ednwards for the Wall Street Journal.
Meanwhile, European high-yield funds have attracted $13 billion so far this year, according to EPFR data. [Thriving European Junk Market Could Lift These ETFs]
The increased demand has helped push down yields on euro-denominated junk bonds to 4% last week, or two percentage points lower in the past year.
The market has seen “a race to the bottom in terms of covenant standards,” David Fancourt, a fund manager at M&G Investments, said in the article.
Nevertheless, some money managers argue that overall quality of European junk bonds have improved, pointing to an uptick of companies that previously held investment-grade ratings that are now given junk status after the debt crisis.
“Issuance this year has probably been of a higher quality than last year because the composition of the market has changed—there’s a lot more issuers now with higher ratings in there,” Arthur Milson, a fund manager at Standard life, said in the article. [Corporate Bond Issuance on the Rise]
Additionally, default rates remain relatively low. According to Moody’s Investor Service, European speculative grade debt default rates declined to 2.5% in the first quarter from 3.7% at the end of 2013.
While there are no Europe-focused speculative-grade debt ETFs on the market, investors can still access European high-yield bonds through international bond ETFs with heavy tilts toward European countries.
For instance, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY) includes a 10.5% exposure to U.K., 9.3% to France and 9.2% to Italy. IHY has a 0.40% expense ratio and a 4.4% 30-day SEC yield.
The SPDR International High Yield Bond ETF (NYSEArca: IJNK) top European country weights include Italy 14.5%, U.K. 10.7% and Germany 10.0%. IJNK has a 0.40% expense ratio. The fund began trading on March 12, 2014. [ETF Spotlight: International Junk Bonds]
Top country holdings in the iShares Global ex USD High Yield Corporate Bond ETF (NYSEArca: HYXU) include France 14.3%, Italy 14.1% and Luxembourg 12.5%. HYXU has a 0.40% expense ratio and a 3.07% 30-day SEC yield.
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.