Oil Slicks for Junk Bond ETFs

The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) allocates 11.4% of its weight to oil and gas producers. Investors may want to take a cautious approach with some master limited partnerships (MLPs), a beloved, income-generating asset class.

“We also believe that investors should be cautious in MLP investing.  Investors have been enticed by the juicy yields offered, but unfortunately many of them are not generating true distributable cash.  Worse yet, ‘cash available for distribution’ is a metric that the company themselves calculate.  This is a situation of the fox guarding the hen house,” said Peritus Asset Management in a note out earlier this year.

Peritus is the sub-advisor for the actively managed AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD). Over a quarter of HYLD’s weight is allocated to issuers hailing from the energy sector, but as an actively managed ETF, HYLD can move more nimbly out of energy positions than its passive rivals should a sell-off in the sector’s high-yield debt occur.

iShares iBoxx $ High Yield Corporate Bond ETF

 

Tom Lydon’s clients own shares of HYG, HYL, JNK and LQD.