Since the financial downturn, high-yield bond exchange traded funds have exhibited a high correlation to the broader equities market. However, the recent tumult in junk bond ETFs has not been reflected in the equities market this time around.
On 10 occasions since 2007 when the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) fell 5% in a span of 30 trading days, the S&P 500 fell as well in nine instances, with an average return of -9%, reports John Melloy for CNBC.
However, since October, HYG has declined 4%, whereas the S&P 500 index is up 3%.
The high-yield ETF only issued one false signal last year when the markets were moving on the Federal Reserve’s quantitative easing program, which contributed to small gain the S&P 500 while junk bonds declined.
“Over the past 10 years, U.S. high-yield bonds have shown positive correlation (74%) with the S&P 500, while the Barclays U.S. Aggregate Bond Index has been relatively uncorrelated (26%) over the same period,” according to Morningstar analyst John Gabriel.
High-yield, junk bonds have exhibited negative correlation with government and aggregate bond portfolios.
“Over the past five years, high-yield bonds have been uncorrelated (12%) with the Barclays U.S. Aggregate Bond Index,” Gabriel added.
Additionally, the speculative-grade debt securities are typically expected to outperform other fixed-income assets in periods of rising inflation and interest rates as these junkier bonds capitalize on their greater dependence on corporate fundamentals and stock-esque returns during a strengthening economic environment.
Nevertheless, the current pullback in junk bond ETFs could be due to energy-sector exposure – the sudden decline in crude oil prices makes it harder for companies to pay back their loans. Still, the S&P 500 has been plugging along, despite the energy sector’s underperformance. [Another Benefit of Lower Duration Junk ETFs: Less Energy Exposure]
iShares iBoxx $ High Yield Corporate Bond ETF
For more information on the speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of HYG.