After junk bond market fell in response to its energy exposure and falling oil prices, fixed-income investors may find opportunities in high-yield bond exchange traded funds with large tilts toward the energy sector.
For instance, the AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) has declined 13.3% over the past year but has staged a 2.2% comeback year-to-date. The junk bond market pulled back after falling oil prices triggered default concerns across heavily indebted U.S. hydraulic fracturing oil start-ups. [Junk Bond ETFs Try to Shake Off Energy Pullback]
Goldman Sachs points out that energy makes up 17% of the Yield Book Citi High Yield Bond Index, reports Leslie Shaffer for CNBC. The HYLD includes a 19% tilt toward the energy sector.
However, credit concerns may have been largely overblown. [Corporate Bond ETFs: Oil-Induced Default Risks Are Overblown]
“Sector fundamentals will no doubt deteriorate sharply as a result of the ‘New Oil Order’ that has been ushered in by the emergence of shale oil technology,” Goldman Sachs said in a note, but added, “high-yield exploration and production [companies]will prove surprisingly resilient in their ability to weather low oil prices without large-scale defaults.”
Consequently, Goldman argue that the effect of oil’s plunge on bonds will be “transitory.” The analysts contends that low oil prices will be an overall economic plus, which should boost credit risk appetite through lower recession risk. Additionally, the company believes default risk among high-yield exploration and production companies is benign as most firms have low refinancing risk, with less than 10% of total issued debt maturing before 2018.
Looking ahead, many oil companies are still flush, and the “average” high-yield E&P player can suffer through three quarters of sub-$50-per-barrel West Texas Intermediate crude prices before things turn sour.
Goldman now anticipates high-yield defaults to inch up to 3.2% by year-end from their current 1.9%. Nevertheless, the higher default rates are still below the 4% long-term average.
“There are some survivors and some companies that may not; but if you identify those that will survive, I think there is tremendous opportunity in energy high-yield,” Carl Eichstaedt, a portfolio manager at Western Asset, said in the article.
HYLD has a short 2.5 year duration and a robust 11.82% 30-day SEC yield. Potential investors should be aware that the actively managed ETF comes with a relatively more expensive 1.18% expense ratio.
AdvisorShares Peritus High Yield ETF
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.