Speculative-grade, or so-called junk bond exchange traded funds are attracting more attention as investors turn to the riskiest corporate debt, with default rates depressed and low interest rates on safer assets.
Investors have picked up triple-C rated corporate debt – bonds that are considered highly speculative in nature, pushing down yields to 8.187% on the Bank of America Merrill Lynch Index, the lowest level on record, the Wall Street Journal reports.
“What we’re seeing is the continued search for yield,” Matthew Rubin, director of investment strategy at Neuberger Berman, said in the article.
The largest junk-bond ETFs, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), come with a 4.36% 30-day SEC yield and a 4.74% 30-day SEC yield, respectively. HYG’s credit quality includes BBB 4.8%, BB 48.5%, B 27.4% and CCC or lower 19.2%. JNK includes BBB 0.2%, BB 39.3%, B 42.3% and CCC or lower 18.1%.
Alternatively, the iShares B – Ca Rated Corporate Bond ETF (NYSEArca: QLTC) specifically targets low-rated debt, including BB 16.6%, B 45.6% and CCC or lower 37.8%. The ETF has a 4.78% 30-day SEC yield.
The benchmark 10-year Treasury bond yields recently dipped below 2.5%, steadily declining this year from 3% at the end of 2013.
The low-rate environment “is forcing folks into riskier strategies in which they feel they will be more richly compensated,” Ford O’Neil, manager at Fidelity Total Bond fund, said in the article.