Approximately 200 exchange traded products debuted in the U.S. last year, the bulk of which were not fixed income funds.
However, last year was a record year for inflows to bond ETFs and some of that growth was contributed by fixed income funds that can still be considered young.
“S&P Capital IQ has rankings and research on approximately 240 fixed income ETFs. The more popular products remain those that are five-plus-years old and that are well-diversified across bond maturities, such as the Vanguard Total Bond Market ETF (NYSEArca: BND) and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD). However, 46% of the universe is ETFs that have less than three years of history,” said S&P Capital IQ in a new research note.
The SPDR Short-Term High Yield ETF (NYSEArca: SJNK) is one of the most popular young bond ETFs. SJNJK, which is less than 60 days away from its third anniversary, has $3.9 billion in assets under management.
At a time when market observers are concerned about the exposure of high-yield ETFs to the energy sector, SJNK’s utility becomes more apparent because its weight to energy paper is less than the allocations to energy debt found in marquee high-yield bond ETFs. [Less Energy Exposure With These Junk Bond ETFs]
Rated marketweight by S&P Capital IQ, SJNK has a 30-day SEC yield of 5.83% and a modified adjusted duration of 2.41 years.
SJNK “has less interest rate sensitivity than other high yield ETFs with an average duration of 2.5 years. Bonds rated B or below from rating agencies that operate independent from S&P Capital IQ comprise 49% of the assets and provide a negative offset in our ranking. The ETF has a 0.40% expense ratio and a bid/ask spread of $0.01, quite tight to us considering the ETF is less than three years old,” according to S&P Capital IQ.
The Guggenheim BulletShares 2016 High Yield Corporate Bond Fund (NYSEArca: BSJG) is part of Guggenheim’s extensive defined maturity BulletShares lineup and is another prime example of a successful, young bond ETF. BSJG will celebrate its third anniversary in late April and is already home to $701.7 million in assets.
“BSJG has an average duration of 2.7 years, but only invests in bonds that mature in 2016. In contrast, SJNK has more than half of its assets with maturities in three to five years according to SSGA’s website. Investors that want to obtain precise exposure to manage risk will find particularly appealing the target maturity aspect of the Guggenheim series that has 14 products less than three years old and approximately $2.6 billion in assets. Relative to SJNK, BSJG has slightly more exposure to bonds rated BB, but it also has a negative credit risk consideration in our ranking methodology. This is offset by its tight $0.01 bid/ask spread,” said S&P Capital IQ.
Defined maturity ETFs typically buy bonds that mature in the year the fund will terminate, ensuring that investors can collect the bonds face value at maturity, along with a steady income payout along the way. Investors are meant to buy-and-hold these types of investments until they mature. In contrast, a regular bond ETF runs the risk of losing its original principal if interest rates go up, depending on the bond ETF’s effective duration. [Defined Maturity ETF Education]
Guggenheim BulletShares 2016 High Yield Corporate Bond ETF
