Money is flowing back into high-yield junk bond exchange traded funds. With more picking up the asset class, investors should be aware of the potential pitfalls in the current bond market environment.
Over the past week, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) gained 0.7% and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 0.8%.
According to Lipper data, retail investors threw cash back into high-yield bonds, funneling $1.05 billion into junk bond ETFs for the week ended March 25, the first positive inflow after two weeks of outflows that erased $3 billion from junk bond funds, reports Joy Ferguson for Forbes.
HYG has attracted $623.2 million in net inflows over the past week while JNK brought in $371.1 million, according to ETF.com.
While yield-chasing investors are looking at junk bond ETFs again with benchmark interest dipping from the high at the start of the month, may may be overlooking potential liquidity risks, reports Ellie Ismailidou for MarketWatch.
Bond index-based ETFs passively reflect the performance of the underlying market and track a portfolio of individual debt securities. Consequently, liquidity concerns are largely based on the overall liquidity in the underlying or primary markets. [How ETFs Are Traded]
However, according to the New York Fed, total dealer inventory among primary dealers, banks and broker-dealers has declined over the past decade. The amount of dealer inventory has declined about 50% from its peak in early 2008. Dealer inventories held about $250 billion in corporate debt in 2007, but inventories have decreased 92% to $20.1 billion today. Collin Martin, director of fixed income strategy for the Schwab Center for Financial Research, argues that the problem is even worse in the high-yield market since the lowest-rated bonds are the least liquid. [Liquidity Concerns in Corporate Bond ETFs]